Results in line with most recent guidance
Net income in the fourth quarter was
Free cash flow of negative
In the fourth quarter, TELUS added 105,000 net new customer connections as growth in wireless, TELUS TV and high speed Internet subscribers partially offset by decreases in traditional landline phone and legacy data connections. Total customer connections for the year increased by 284,000 to 12 million.
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------
C$ and in millions, except per share amounts 3 months ended
December 31
(unaudited) 2009 2008 % Change
-------------------------------------------------------------------------
Operating revenues 2,443 2,454 (0.4)
Operations expense 1,577 1,479 6.6
Restructuring costs 77 38 n.m.
EBITDA(1) 789 937 (15.8)
Income before income taxes 108 373 (71.0)
Net income(2)(3) 156 285 (45.3)
Earnings per share (EPS), basic(2)(3) 0.49 0.90 (45.6)
Cash provided by operating activities 624 747 (16.5)
Capital expenditures 514 631 (18.5)
Free cash flow(4) (35) 61 n.m.
Total customer connections (millions) 11.96 11.67 2.4
(1) Earnings before interest, taxes, depreciation and amortization
(EBITDA) is defined as Operating revenues less Operations expense
less Restructuring costs. See Section 6.1 of Management's review of
operations.
(2) Net income and EPS for the three month period in 2009 included
favourable income tax-related adjustments related to prior year tax
matters of approximately $79 million net of tax or 25 cents per share
respectively, compared to $32 million or 10 cents for the same period
in 2008.
(3) Net income and EPS for the three month period in 2009 included an
unfavourable after-tax impact of approximately $69 million or 22
cents per share resulting from the loss on early partial redemption
of June 2011 notes.
(4) See Section 6.2 of Management's review of operations.
"There is no question that the last year was a challenging one economically, but also one where we progressed game-changing capital projects and made significant investments in operational efficiency to improve our cost structure. Combined, these initiatives will launch TELUS into its next stage of net income and cash flow growth,"
Robert McFarlane, TELUS executive vice-president and CFO said, "TELUS made significant progress with major strategic investments in 2009 such as the new wireless HSPA and wireline ADSL2+ higher speed broadband networks that we expect to positively impact future financial results. We are also looking forward to significant cash flow expansion as consolidated capital investment levels return to more historical levels in 2010. In December, TELUS successfully accessed the Canadian capital markets at an attractive 5.05 per cent interest rate for
-------------------------------------------------------------------------
This news release contains statements about expected future events and
financial and operating results of TELUS that are forward-looking. By
their nature, forward-looking statements require the Company to make
assumptions and are subject to inherent risks and uncertainties. There is
significant risk that the forward-looking statements will not prove to be
accurate. Readers are cautioned not to place undue reliance on forward-
looking statements as a number of factors could cause actual future
results and events to differ materially from that expressed in the
forward-looking statements. Accordingly this news release is subject to
the disclaimer and qualified by the assumptions (including assumptions
for 2010 guidance), qualifications and risk factors (including those
associated with the deployment and operation of the new national high-
speed packet access network and associated introduction of new products,
services and systems) referred to in the Management's discussion and
analysis in the 2008 annual report, and in the 2009 quarterly reports.
Except as required by law, TELUS disclaims any intention or obligation to
update or revise forward-looking statements, and reserves the right to
change, at any time at its sole discretion, its current practice of
updating annual targets and guidance.
-------------------------------------------------------------------------
OPERATING HIGHLIGHTS
TELUS wireless
- External revenues increased by $37 million or 3.1% to $1.2 billion in
the fourth quarter of 2009, compared with the same period in 2008,
with equipment sales and other revenue growth of $56 million, which
included a full quarter of revenue from newly acquired Black's Photo,
offsetting a decline in network revenue.
- Wireless data revenue of $243 million increased $40 million or 20%
due to the continued adoption of smartphones and mobile Internet
keys, and increased use of data services such as text messaging and
wireless social networking.
- ARPU (average revenue per subscriber unit per month) declined by 7.7%
to $57.38 compared to the same quarter a year ago, as voice ARPU
continued its downward trend due to declining minutes of use and plan
optimization by consumers and businesses, lower business-oriented
Mike service revenue, increased proportion of Koodo Mobile customers,
and decreased inbound roaming revenues. The fast growing data
component increased by 13% to $12.60 and represented 22% of ARPU.
- Net subscriber additions of 122,000 were 18% lower than for the same
period a year ago. The year-over-year decrease was primarily due to
lower prepaid net additions and the company's focus on launching a
number of major wireless strategic initiatives that began ramping up
in November. Higher value postpaid net additions were 109,000 and
represented 89% of total new wireless customers, up from 80% in the
year-ago period.
- Blended monthly subscriber churn was essentially flat year-over-year
at 1.60%.
- EBITDA of $435 million decreased by 12% due to declining voice ARPU
and increased retention costs.
- Cost of acquisition per gross addition increased by only 2.2% year-
over-year to $380, reflecting higher advertising and promotional
expenses related to the new 3G+ wireless network launch in November,
and higher cost of subsidizing smartphone devices (notably including
the Apple iPhone), partially offset by lower commissions.
- Cost of retention of $133 million increased by $28 million,
reflecting higher costs associated with increased retention volumes
to support customer migrations to smartphones, including the Apple
iPhone.
- Simple cash flow (EBITDA less capital expenditures) decreased by $13
million to $243 million in the quarter due to lower EBITDA,
partially offset by lower capital spending.
TELUS wireline
- External revenues decreased by $48 million or 3.8% to $1.2 billion in
the fourth quarter of 2009, when compared with the same period in
2008, largely due to declines in voice local and long distance
revenues.
- Data revenues increased by $26 million or 4.9% due to TELUS TV
subscriber growth, increased Internet, enhanced data and hosting
services, and higher managed workplace revenues.
- TELUS high-speed Internet net additions of 11,000 were down from
19,000 in the same period a year ago, due to a maturing market, a
decline in household formation, as well as promotional and winback
activity by cable-TV competitors.
- TELUS TV net additions were 33,000, an increase of 120% over the same
period last year, due to improved installation capabilities, enhanced
broadband coverage and capability and the addition of TELUS Satellite
TV service.
- Network access lines (NALs) declined by 52,000 in the quarter to 4
million, down 4.7% from a year ago. Residential NAL losses of 41,000
slightly improved year-over-year due to more effective winbacks and
the positive impact from bundled service offerings, including TELUS
TV. Business NALs declined by 11,000 primarily in Western Canada, due
to economic and competitive factors, which more than offset increased
business lines in Ontario and Quebec.
- EBITDA of $354 million decreased by $91 million or 20% in large part
due to higher restructuring costs and pension expenses. EBITDA
excluding restructuring costs and pension expenses decreased by $20
million with cost savings partially offsetting the decline in
revenue.
- Simple cash flow (EBITDA less capital expenditures) decreased $18
million to $32 million in the quarter as lower EBITDA was partially
offset by lower capital expenditures.
CORPORATE AND BUSINESS DEVELOPMENTS
Exciting developments with TELUS TV
In early February, TELUS launched a new TELUS IP TV platform in B.C.'s Lower Mainland and parts of Alberta, bringing its customers the latest in carrier-grade, digital TV technology. Clients on the new service, powered by Microsoft Mediaroom and available exclusively by TELUS in Western
TELUS continues to expand the reach of HD TV service and Internet-based TELUS TV to other communities. Notably, HD service coverage in greater
These developments have been made possible by and leverage the significant investments TELUS made in 2009 to enhance the coverage and capabilities of its broadband network.
TELUS wireless major developments
In November, TELUS announced a number of developments that significantly improved TELUS' competitive position in wireless. The launch of Canada's largest 3G+ network offers customers HSPA/HSPA+ technology for increased wireless data download speeds of up to 21 megabits per second and an enhanced range of wireless data applications.
The new network allows TELUS to benefit from the future global ecosystem, economies of scale and enhanced roaming revenues. The 3G+ network provides TELUS immediate access to the world's best selection of devices from Apple, HTC, Huawei, LG, Nokia, RIM, Samsung, Sierra Wireless, and others including new devices powered by the Google Android operating system. This enables us to offer customers better choice in terms of devices, services and applications.
To complement the new smartphone line-up, and based on consumer research, TELUS introduced a suite of Clear Choice rate plans to simplify its approach to the market place. Clear Choice plans have no system access or carrier 911 fees, and a reduced number of options, making it easier for customers to choose a plan right for them, while at the same time supporting enhanced efficiency.
Also in November, TELUS expanded its wireless distribution capabilities by launching wireless sales in Black's Photo Stores, which were acquired in September. Black's is a national imaging and digital retailer in
TELUS implements enhanced wireless emergency 911 service
Late in January, TELUS implemented phase II enhanced wireless 911 (e911) services across its three wireless networks, which are based on HSPA, CDMA, and iDEN (Mike) technologies. The new technology allows TELUS and other wireless carriers to pass enhanced location information to 911 operators, helping them to be better able to locate an emergency 911 caller using a wireless device with the applicable technology. The system uses a combination of the most advanced GPS technology available, as well as cell tower trilateration to provide the most accurate possible location information, depending on the handset type. Each technology has different strengths, with Assisted GPS providing the best possible location. In ideal conditions, Assisted GPS should be able to locate a caller within 50 meters.
Phase II e911 is a complex project requiring coordination between wireless carriers, and third party 911 operator centres (called public safety answering points or PSAPs), and emergency services. While TELUS is offering this enhanced service across its networks, a small number of PSAPs have not yet integrated the required technology or training. TELUS is continuing to work with those PSAPs to implement the new system as soon as they are ready.
TELUS issues long-term debt to fund early partial redemption of 2011 Notes
In early December, TELUS issued 10-year Canadian dollar notes, raising approximately
TELUS to adopt "say on pay"
In January, TELUS announced that its Board of Directors has unanimously approved the adoption of a non-binding advisory vote by shareholders on executive compensation. This vote, to be held at the annual general meeting next year, will give TELUS shareholders an opportunity to give direct feedback to the Board of Directors on the company's approach to executive compensation. Being one of the first large corporations in
Award of Excellence for TELUS corporate reporting
TELUS received an Award of Excellence for Corporate Reporting from the Canadian Institute of Chartered Accountants (CICA) in its sector. The award is for TELUS' 2008 financial reporting including its annual report, information circular, corporate social responsibility (CSR) report, and the online investor relations and corporate governance sites. This is the 15th straight year CICA has recognized TELUS for excellence in corporate reporting. The judges remarked that TELUS' corporate social responsibility practices clearly demonstrate the company's commitment to the environment. They also commended TELUS for its clear annual targets, an outstanding discussion of TELUS business and environment, an honest assessment of TELUS strengths and achievements, an easy-to-navigate financial statement, transparent scorecard disclosure, an online annual financial statement second to none and hotline services in many languages, making TELUS unique to the telecommunications industry.
TELUS named most outstanding philanthropic corporation with global award
TELUS in January was named the top philanthropic corporation for 2010. TELUS is the first Canadian company to ever receive this global award - the Freeman Philanthropic Services Award for Outstanding Corporation from The Association of Fundraising Professionals (AFP). Paulette V. Maehara, president and CEO of AFP said "Their approach to philanthropy and their demonstrated commitment to employee involvement through their charitable giving and volunteerism programs sets the standards for corporations around the world." The AFP represents 30,000 members in 207 chapters throughout the world, working to advance philanthropy through advocacy, research, education and certification programs.
Guided by the motto, "We Give Where We Live," TELUS, its team members and retirees gave
TELUS
In February,
TELUS connects with
TELUS one of Canada's 10 most admired corporate cultures
Waterstone Human Capital named TELUS to its list of Canada's 10 Most Admired Corporate Cultures in
SickKids
TELUS and Kids' Health Links Foundation launched Upopolis.com at The Hospital for Sick Children (SickKids) in
Awards for business excellence, community and environmental involvement
TELUS and its team members were honoured with a number of other awards in the fourth quarter including:
- 2009 Health Transformation Company of the Year by the Information
Technology Association of Canada (ITAC). The award honours TELUS
Health Solutions as the healthcare information and communication
technology company that has most fundamentally transformed healthcare
in 2009 through the use of health informatics.
- Audrey Ho, TELUS senior vice-president and chief general counsel, was
named one of Canada's Most Powerful Women by the Women's Executive
Network.
- The American Society for Training and Development recognized TELUS
with a BEST Award, designating the company as one of the top
organizations worldwide for employee learning and development that
drives enterprise-wide success.
- Capacity Magazine's Global Wholesale Award for Best Regional North
American Wholesale Offering, for demonstrating thought leadership in
the development and implementation of its wholesale strategy within
North America. TELUS is the first Canadian company to receive the
award.
- 2009 Prix Arts-Affaires de Montréal in the large enterprise category
recognized TELUS for its support of Montreal arts and cultural
organizations. The award is an initiative of the Board of Trade of
Metropolitan Montreal and the Conseil des arts de Montréal, in
collaboration with daily newspaper Le Devoir and ARTV.
- Award from Greener Containers, Packaging and Printed Matter: Today's
Reality, Today's Opportunities! organized by Éco Entreprises Québec.
TELUS submitted its new plastic-free eco-packaging designed for phone
cases, chargers, memory cards and other accessories. The new
packaging will enable TELUS to save annually close to 1,000 trees,
eliminate 30 kilograms of solid waste, and trim consumption by 2,675
litres of water and nearly 4,000 cubic metres of natural gas.
DIVIDEND DEVELOPMENTS
TELUS dividend reinvestment program offers 3% share price discount
In November, the Board of Directors approved an amendment to TELUS' dividend reinvestment and share repurchase program (DRISP), for the benefit of participating shareholders. Beginning with the common and non-voting quarterly dividend paid on
Dividend Declaration
The Board of Directors has declared a quarterly dividend of forty-seven and one half cents (
Access to Quarterly results information
Interested investors, the media and others may review this quarterly earnings release, quarterly results slides, supplementary financial information and our full first, second, and third quarter 2009 report on our website at telus.com/investors.
Quarterly conference call and webcast presentation
TELUS quarterly conference call is scheduled for
About TELUS
TELUS (TSX: T, T.A; NYSE: TU) is a leading national telecommunications company in
In support of our philosophy to give where we live, TELUS, our team members and retirees have contributed
For more information about TELUS, please visit telus.com.
TELUS Corporation
interim consolidated statements of income and
other comprehensive income (unaudited)
Periods ended December 31
(millions except per Three months Twelve months
share amounts) 2009 2008 2009 2008
-------------------------------------------------------------------------
(as adjusted) (as adjusted)
OPERATING REVENUES $ 2,443 $ 2,454 $ 9,606 $ 9,653
-------------------------------------------------------------------------
OPERATING EXPENSES
Operations 1,577 1,479 5,925 5,815
Restructuring costs 77 38 190 59
Depreciation 347 351 1,341 1,384
Amortization of
intangible assets 94 84 381 329
-------------------------------------------------------------------------
2,095 1,952 7,837 7,587
-------------------------------------------------------------------------
OPERATING INCOME 348 502 1,769 2,066
Other expense, net 10 11 32 36
Financing costs 230 118 532 463
-------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 108 373 1,205 1,567
Income taxes (48) 88 203 436
-------------------------------------------------------------------------
NET INCOME 156 285 1,002 1,131
OTHER COMPREHENSIVE INCOME
Change in unrealized fair
value of derivatives
designated as cash flow
hedges 33 (20) 69 (26)
Foreign currency
translation adjustment
arising from translating
financial statements of
self-sustaining foreign
operations - 3 (12) 2
Change in unrealized fair
value of available-for-sale
financial assets - - 1 (2)
-------------------------------------------------------------------------
33 (17) 58 (26)
-------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 189 $ 268 $ 1,060 $ 1,105
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET INCOME ATTRIBUTABLE TO:
Common Shares and
Non-Voting Shares $ 155 $ 285 $ 998 $ 1,128
Non-controlling interests 1 - 4 3
-------------------------------------------------------------------------
$ 156 $ 285 $ 1,002 $ 1,131
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME
ATTRIBUTABLE TO:
Common Shares and
Non-Voting Shares $ 188 $ 268 $ 1,056 $ 1,102
Non-controlling interests 1 - 4 3
-------------------------------------------------------------------------
$ 189 $ 268 $ 1,060 $ 1,105
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
AND NON-VOTING SHARE
- Basic $ 0.49 $ 0.90 $ 3.14 $ 3.52
- Diluted $ 0.49 $ 0.89 $ 3.14 $ 3.51
DIVIDENDS DECLARED PER
COMMON SHARE AND NON-VOTING
SHARE $ 0.475 $ 0.475 $ 1.90 $ 1.825
TOTAL WEIGHTED AVERAGE COMMON
SHARES AND NON-VOTING SHARES
OUTSTANDING
- Basic 318 318 318 320
- Diluted 318 319 318 322
TELUS Corporation
interim consolidated statements of financial position (unaudited)
As at December 31 (millions) 2009 2008
-------------------------------------------------------------------------
(as adjusted)
ASSETS
Current Assets
Cash and temporary investments, net $ 41 $ 4
Accounts receivable 694 966
Income and other taxes receivable 16 25
Inventories 270 397
Prepaid expenses 105 112
Derivative assets 1 10
-------------------------------------------------------------------------
1,127 1,514
-------------------------------------------------------------------------
Non-Current Assets
Property, plant, equipment and other, net 7,729 7,317
Intangible assets, net 5,148 5,166
Goodwill 3,572 3,564
Other long-term assets 1,602 1,418
Investments 41 42
-------------------------------------------------------------------------
18,092 17,507
-------------------------------------------------------------------------
$ 19,219 $ 19,021
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND OWNERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 1,385 $ 1,465
Income and other taxes payable 182 163
Restructuring accounts payable and accrued
liabilities 135 51
Dividends payable 150 151
Advance billings and customer deposits 674 689
Current maturities of long-term debt 82 4
Current portion of derivative liabilities 62 75
Current portion of future income taxes 294 459
-------------------------------------------------------------------------
2,964 3,057
-------------------------------------------------------------------------
Non-Current Liabilities
-------------------------------------------------------------------------
Long-term debt 6,090 6,348
Other long-term liabilities 1,271 1,295
Future income taxes 1,319 1,213
-------------------------------------------------------------------------
8,680 8,856
-------------------------------------------------------------------------
Total Liabilities 11,644 11,913
-------------------------------------------------------------------------
Owners' Equity
Common Share and Non-Voting Share equity 7,554 7,085
Non-controlling interests 21 23
-------------------------------------------------------------------------
7,575 7,108
-------------------------------------------------------------------------
$ 19,219 $ 19,021
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
interim consolidated statements of cash flows (unaudited)
Three months Twelve months
Periods ended December 31
(millions) 2009 2008 2009 2008
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (as adjusted) $ 156 $ 285 $ 1,002 $ 1,131
Adjustments to reconcile net
income to cash provided by
operating activities:
Depreciation and
amortization 441 435 1,722 1,713
Future income taxes (314) (129) (83) 161
Share-based compensation (25) (20) (8) 5
Net employee defined
benefit plans expense 8 (27) 20 (102)
Employer contributions to
employee defined benefit
plans (45) (26) (180) (104)
Restructuring costs, net
of cash payments 51 30 84 16
Amortization of deferred
gains on sale-leaseback
of buildings, amortization
of deferred charges and
other, net (1) 8 8 -
Net change in non-cash
working capital 353 191 339 (1)
-------------------------------------------------------------------------
Cash provided by operating
activities 624 747 2,904 2,819
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (514) (631) (2,103) (1,859)
Payment for advanced
wireless services spectrum
licences - - - (882)
Acquisitions - - (26) (696)
Proceeds from the sale of
property and other assets - - - 13
Other 1 (12) 1 (9)
-------------------------------------------------------------------------
Cash used by investing
activities (513) (643) (2,128) (3,433)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Common Shares and Non-Voting
Shares issued - - 1 -
Dividends to holders of
Common Shares and Non-Voting
Shares (151) (144) (602) (433)
Purchase of Common Shares
and Non-Voting Shares for
cancellation - (6) - (280)
Long-term debt issued 2,003 3,438 9,112 12,983
Redemptions and repayment
of long-term debt (1,956) (3,424) (9,244) (11,667)
Dividends paid by a
subsidiary to
non-controlling interests - - (6) (5)
-------------------------------------------------------------------------
Cash provided (used) by
financing activities (104) (136) (739) 598
-------------------------------------------------------------------------
CASH POSITION
Increase (decrease) in cash
and temporary investments,
net 7 (32) 37 (16)
Cash and temporary
investments, net, beginning
of period 34 36 4 20
-------------------------------------------------------------------------
Cash and temporary
investments, net, end of
period $ 41 $ 4 $ 41 $ 4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOWS
Interest (paid) $ (296) $ (193) $ (567) $ (457)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest received $ - $ 1 $ 54 $ 3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income taxes (inclusive of
Investment Tax Credits)
(paid) received, net $ 4 $ (2) $ (266) $ (10)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS Corporation
segmented information (unaudited)
Three-month periods ended
December 31 Wireline Wireless
(millions) 2009 2008 2009 2008
-------------------------------------------------------------------------
Operating revenues
External revenue $ 1,218 $ 1,266 $ 1,225 $ 1,188
Intersegment revenue 36 35 7 7
-------------------------------------------------------------------------
1,254 1,301 1,232 1,195
-------------------------------------------------------------------------
Operating expenses
Operations expense 826 824 794 697
Restructuring costs 74 32 3 6
-------------------------------------------------------------------------
900 856 797 703
-------------------------------------------------------------------------
EBITDA(1) $ 354 $ 445 $ 435 $ 492
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 322 $ 395 $ 192 $ 236
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less capital
expenditures $ 32 $ 50 $ 243 $ 256
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three-month periods ended
December 31 Eliminations Consolidated
(millions) 2009 2008 2009 2008
-------------------------------------------------------------------------
Operating revenues
External revenue $ - $ - $ 2,443 $ 2,454
Intersegment revenue (43) (42) - -
-------------------------------------------------------------------------
(43) (42) 2,443 2,454
-------------------------------------------------------------------------
Operating expenses
Operations expense (43) (42) 1,577 1,479
Restructuring costs - - 77 38
-------------------------------------------------------------------------
(43) (42) 1,654 1,517
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 789 $ 937
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ - $ - $ 514 $ 631
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less capital
expenditures $ - $ - $ 275 $ 306
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA (from above) $ 789 $ 937
Depreciation 347 351
Amortization 94 84
---------------------------------------------
Operating income 348 502
Other expense, net 10 11
Financing costs 230 118
---------------------------------------------
Income before income
taxes 108 373
Income taxes (48) 88
---------------------------------------------
Net income $ 156 $ 285
---------------------------------------------
---------------------------------------------
Years ended December 31 Wireline Wireless
(millions) 2009 2008 2009 2008
-------------------------------------------------------------------------
Operating revenues
External revenue $ 4,899 $ 5,021 $ 4,707 $ 4,632
Intersegment revenue 134 131 28 28
-------------------------------------------------------------------------
5,033 5,152 4,735 4,660
-------------------------------------------------------------------------
Operating expenses
Operations expense 3,297 3,327 2,790 2,647
Restructuring costs 178 51 12 8
-------------------------------------------------------------------------
3,475 3,378 2,802 2,655
-------------------------------------------------------------------------
EBITDA(1) $ 1,558 $ 1,774 $ 1,933 $ 2,005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 1,333 $ 1,311 $ 770 $ 548
Advanced wireless services
spectrum licences - - - 882
-------------------------------------------------------------------------
CAPEX(2) $ 1,333 $ 1,311 $ 770 $ 1,430
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ 225 $ 463 $ 1,163 $ 575
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Years ended December 31 Eliminations Consolidated
(millions) 2009 2008 2009 2008
-------------------------------------------------------------------------
Operating revenues
External revenue $ - $ - $ 9,606 $ 9,653
Intersegment revenue (162) (159) - -
-------------------------------------------------------------------------
(162) (159) 9,606 9.653
-------------------------------------------------------------------------
Operating expenses
Operations expense (162) (159) 5,925 5,815
Restructuring costs - - 190 59
-------------------------------------------------------------------------
(162) (159) 6,115 5,874
-------------------------------------------------------------------------
EBITDA(1) $ - $ - $ 3,491 $ 3,779
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ - $ - $ 2,103 $ 1,859
Advanced wireless services
spectrum licences - - - 882
-------------------------------------------------------------------------
CAPEX(2) $ - $ - $ 2,103 $ 2,741
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less CAPEX $ - $ - $ 1,388 $ 1,038
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA (from above) $ 3,491 $ 3,779
Depreciation 1,341 1,384
Amortization 381 329
---------------------------------------------
Operating income 1,769 2,066
Other expense, net 32 36
Financing costs 532 463
---------------------------------------------
Income before income
taxes 1,205 1,567
Income taxes 203 436
---------------------------------------------
Net income $ 1,002 $ 1,131
---------------------------------------------
---------------------------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") is a measure that does not have any standardized meaning
prescribed by GAAP and is therefore unlikely to be comparable to
similar measures presented by other issuers; EBITDA is defined by the
Company as operating revenues less operations expense and
restructuring costs. The Company has issued guidance on, and reports,
EBITDA because it is a key measure used by management to evaluate
performance of its business segments and is utilized in measuring
compliance with certain debt covenants.
(2) Total capital expenditures ("CAPEX") are the sum of capital
expenditures and advanced wireless services spectrum licences.
-------------------------------------------------------------------------
TELUS CORPORATION
Management's review of operations
2009 Q4
-------------------------------------------------------------------------
Caution regarding forward-looking statements
-------------------------------------------------------------------------
This document contains forward-looking statements about expected future
events and financial and operating performance of TELUS Corporation (TELUS or
the Company, and where the context of the narrative permits, or requires, its
subsidiaries). By their nature, forward-looking statements require the Company
to make assumptions, and forward-looking statements are subject to inherent
risks and uncertainties. There is significant risk that assumptions,
predictions and other forward-looking statements will not prove to be
accurate. Readers are cautioned not to place undue reliance on forward-looking
statements as a number of factors could cause future performance, conditions,
actions or events to differ materially from the targets, expectations,
estimates or intentions expressed. Except as required by law, the Company
disclaims any intention or obligation to update or revise any forward-looking
statements, and reserves the right to change, at any time at its sole
discretion, its current practice of updating annual targets and guidance.
Targets for 2010 and assumptions are described in Section 1.5.
Factors that could cause actual performance to differ materially include,
-------------------------------------------------------------------------
but are not limited to:
-----------------------
Competition (including more active price competition; the expectation that
new wireless competitors will launch or expand services in 2010 using advanced
wireless services (AWS) spectrum; industry growth rates including wireless
penetration gain; actual network access line losses; TELUS TV and wireless
subscriber additions experience; variability in wireless average revenue per
unit (ARPU) as well as variability in subscriber acquisition and retention
costs that are dependent on subscriber loading and retention volumes,
smartphone sales and subsidy levels, and TELUS TV installation costs);
economic growth and fluctuations (including strength and persistence of the
economic recovery in Canada, and pension performance, funding and expenses);
capital expenditure levels in 2010 and beyond (due to the Company's wireline
broadband initiatives, fourth generation (4G) wireless deployment strategy,
and any new Industry Canada wireless spectrum auctions); financing and debt
requirements (including ability to carry out refinancing activities); tax
matters (including acceleration or deferral of required payments of
significant amounts of cash taxes); human resource developments (including
collective bargaining in the TELUS Québec region and for a national collective
agreement expiring in late 2010); business integrations and internal
reorganizations (including ability to successfully implement cost reduction
initiatives and realize expected savings); technology (including reliance on
systems and information technology, broadband and wireless technology options
and roll-out plans, choice of suppliers and suppliers' ability to maintain and
service their product lines, expected technology and evolution path and
transition to 4G technology, expected future benefits and performance of
high-speed packet access (HSPA)/long-term evolution (LTE) wireless technology,
successful deployment and operation of new wireless networks and successful
introduction of new products (such as new HSPA devices), new services and
supporting systems; and successful upgrades of TELUS TV technology);
regulatory approvals and developments (including the incumbent local exchange
carriers' (ILEC's) obligation to serve; utilization of funds in the ILEC's
deferral accounts; interpretation and application of tower sharing and roaming
rules, the design and impact of future spectrum auctions (including the cost
of acquiring the spectrum), and possible changes to foreign ownership
restrictions); process risks (including conversion of legacy systems and
billing system integrations, and implementation of large complex enterprise
deals that may be adversely impacted by available resources and degree of
co-operation from other service providers); health, safety and environmental
developments; litigation and legal matters; business continuity events
(including human-caused and natural threats); any future acquisitions or
divestitures; and other risk factors discussed herein and listed from time to
time in TELUS' reports and public disclosure documents including its annual
report, annual information form, and other filings with securities commissions
in Canada (on SEDAR at sedar.com) and in its filings in the United States,
including Form 40-F (on EDGAR at sec.gov).
For further information, see Risks and risk management in Section 10 of
TELUS' 2008 annual and 2009 first, second and third quarter Management's
discussion and analyses, as well as updates reported in Section 5 of this
document.
-------------------------------------------------------------------------
Management's review of operations
The following sections are a discussion of the consolidated financial position and financial performance of TELUS Corporation for the three-month periods and years ended
The unaudited summary consolidated financial information accompanying this discussion has been prepared in accordance with Canadian generally accepted accounting principles (GAAP). All amounts are in Canadian dollars unless otherwise specified.
Management's review of operations
-------------------------------------------------------------------------
Section Description
-------------------------------------------------------------------------
1. Introduction, performance A summary of TELUS' consolidated results
summary and targets for 2009, performance against 2009
targets, and presentation of targets for
2010
-------------------------------------------------------------------------
2. Discussion of operations A detailed discussion of operating
performance for the fourth quarter and
year ended December 31, 2009
-------------------------------------------------------------------------
3. Changes in financial A discussion of changes in the
position consolidated statements of financial
position for the year ended December 31,
2009
-------------------------------------------------------------------------
4. Liquidity and capital A discussion of cash flow, liquidity,
resources credit facilities and other disclosures
-------------------------------------------------------------------------
5. Risks and risk management An update of certain risks and
uncertainties facing TELUS and how the
Company manages these risks
-------------------------------------------------------------------------
6. Definitions and Definitions of operating, liquidity and
reconciliations capital resource measures, including
calculation and reconciliation of certain
non-GAAP measures used by management
-------------------------------------------------------------------------
1. Introduction, performance summary and targets
The discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of Management's review of operations.
1.1 Preparation of Management's review of operations
The Company's disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management on a timely basis, so that appropriate decisions can be made regarding public disclosure. Management determines whether or not information is material based on whether it believes a reasonable investor's decision to buy, sell or hold securities in the Company would likely be influenced or changed if the information were omitted or misstated. This discussion was reviewed by TELUS' Audit Committee and approved by TELUS' Board of Directors.
Management has issued guidance on and reports on certain non-GAAP measures to evaluate performance of segments and the Company. Non-GAAP measures are also used to determine compliance with debt covenants and manage the capital structure. Because non-GAAP measures do not generally have a standardized meaning, securities regulations require that non-GAAP measures be clearly defined and qualified, and reconciled with their nearest GAAP measure. The Canadian Institute of Chartered Accountants (CICA) Corporate Performance Reporting Board has issued guidelines that define standardized EBITDA and standardized free cash flow. While EBITDA and free cash flow discussed in this document are management's definitions, reconciliations to the standardized definitions are provided in Section 6: Definitions and reconciliations.
1.2 Canadian economy and telecommunications industry
Economic environment
Canada's economy entered into a recession in the fourth quarter of 2008 that continued through the first half of 2009, followed by modest growth beginning in the third quarter of 2009. Unemployment levels rose to approximately 8.6% in the fourth quarter of 2009, up from 6.4% one year earlier, and it is expected that improvement in unemployment levels will lag the economic recovery. The Bank of
In this uncertain economic environment, consumers and business customers deferred buying decisions, focused more on value, and increased their expectations for lower pricing. See TELUS' risks discussion in Section 5.3 Economic growth and fluctuations.
Economic effects on TELUS
The Company had to adjust to a weaker than expected Canadian economy that reduced wireless revenue growth and accelerated the Company's efficiency efforts to help mitigate the effects of the recession. The economic downturn that began in late 2008 had a significant impact on first quarter wireless results in 2009, prompting management to issue an early release of the weak wireless subscriber results on
The wireline segment was impacted in 2009 by slower data revenue growth and faster erosion in voice revenue. Strong price competition in both data and voice services, as well as more cautious spending by consumers and businesses, are contributing factors. The Company observed a larger number of disconnections and fewer installations of business network access lines (NALs) in B.C. and Alberta, attributed partly to economic uncertainty and partly to competition. However, residential NAL losses moderated in 2009 at 6.8%, as compared to 7.5% in 2008.
TELUS' capital structure financial policies were designed with credit cycles in mind. The Company believes that these financial policies and guidelines, and maintaining credit ratings in the range of BBB+ to A-, or the equivalent, provide reasonable access to capital markets. This is illustrated by the Company's successful financing activities in 2009, including two new long-term debt issues that facilitated a reduction in amounts drawn on the 2012 credit facility, as well as early partial redemption of U.S. dollar Notes maturing in
The economic weakness and stock market decline in 2008 increased TELUS' net defined benefit pension plans expense and funding in 2009. The expectation is that the 2010 defined benefit pension plans expense will increase by approximately
Despite the challenges of the economic downturn and uneven recovery in 2009, the Company achieved many successes including the early launch of the national 3G+ wireless network, expanded reach and speed of broadband services, expanded coverage of TELUS TV(R) services, and progress in optimizing resources for the economic and competitive environment. These achievements are expected to better position the Company for the future.
Telecom industry growth
The Company estimates that revenue growth for the Canadian telecom industry slowed to approximately 1% in 2009 as compared to 3 to 5% in recent years. This can be attributed to the impacts of the recession as wireless growth was reduced by lower ARPU and subscriber growth, and wireline enhanced data growth was largely offset by declines in mature wireline voice local, long distance and legacy data services. TELUS estimates that Canadian wireless industry revenues grew by 3.5% in 2009, with market penetration increasing by an estimated 3.6 percentage points. In this context, TELUS' 2009 consolidated revenues decreased by 0.5% for the year, as wireless revenue growth of 1.6% only partially offset the 2.4% decrease in wireline revenues. In both segments, declines in voice revenues exceeded growth in data revenues.
1.3 Consolidated highlights
-------------------------------------------------------------------------
Quarters ended Years ended
($ millions, unless December 31 December 31
noted otherwise) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Consolidated statements
of income
-------------------------------------------------------------------------
Operating revenues 2,443 2,454 (0.4)% 9,606 9,653 (0.5)%
Operating income 348 502 (30.7)% 1,769 2,066 (14.4)%
Income before
income taxes 108 373 (71.0)% 1,205 1,567 (23.1)%
Net income 156 285 (45.3)% 1,002 1,131 (11.4)%
Earnings per share
(EPS)(1) basic ($) 0.49 0.90 (45.6)% 3.14 3.52 (10.8)%
EPS(1) diluted ($) 0.49 0.89 (45.2)% 3.14 3.51 (10.5)%
Cash dividends
declared per
share(1) ($) 0.475 0.475 - % 1.90 1.825 4.1 %
Average shares(1)
outstanding - basic
(millions) 318 318 - % 318 320 (0.6)%
-------------------------------------------------------------------------
Consolidated statements
of cash flows
-------------------------------------------------------------------------
Cash provided by
operating activities 624 747 (16.5)% 2,904 2,819 3.0 %
Cash used by
investing activities 513 643 (20.2)% 2,128 3,433 (38.0)%
Capital expenditures
General 514 631 (18.5)% 2,103 1,859 13.1 %
Payment for AWS
spectrum licences - - - - 882 n/m
---------------------------------------------------
Total 514 631 (18.5)% 2,103 2,741 (23.3)%
Acquisitions - - n/m 26 696 (96.3)%
Cash (used) provided by
financing activities (104) (136) 23.5 % (739) 598 n/m
-------------------------------------------------------------------------
Subscribers and other
measures
-------------------------------------------------------------------------
Subscriber connections(2)
(thousands) 11,957 11,673 2.4 %
EBITDA(3) 789 937 (15.8)% 3,491 3,779 (7.6)%
Free cash flow(3) (35) 61 n/m 500 361 38.5 %
-------------------------------------------------------------------------
Debt and payout ratios(4)
-------------------------------------------------------------------------
Net debt to EBITDA -
excluding restructuring
costs (times) 2.0 1.9 0.1
Dividend payout
ratio(5) (%) 67 56 11 pts.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
n/m - not meaningful; pts. - percentage points
(1) Includes Common Shares and Non-Voting Shares.
(2) The sum of wireless subscribers, network access lines, Internet
access subscribers and TELUS TV subscribers (IP TV and satellite TV),
measured at the end of the respective periods, based on information
in billing and other systems. In the second quarter of 2009, the
opening balance for subscriber connections was reduced by 5,000 to
reflect prior period reporting adjustments to high-speed Internet
subscribers, and in the fourth quarter of 2009 the opening balance
for subscriber connections was reduced by approximately 11,000 to
reflect prior period reporting adjustments to wireless postpaid
subscribers.
(3) EBITDA and free cash flow are non-GAAP measures. See Section 6.1
Earnings before interest, taxes, depreciation and amortization
(EBITDA) and Section 6.2 Free cash flow.
(4) See Section 4.4 Liquidity and capital resource measures and Section
6.4 Definitions of liquidity and capital resource measures.
(5) Based on earnings per share excluding favourable income tax-related
adjustments of 55 cents per share in 2009 and 15 cents per share in
2008, 22 cents per share loss on redemption of long-term debt in
2009, and minor impacts from a net-cash settlement feature.
-------------------------------------------------------------------------
Highlights from operations, including a comparison of results for the fourth quarter and full year of 2009, or measures as at
- Subscriber connections increased by 284,000 in 2009. This includes
6.4% growth in wireless subscribers and 118% growth in TELUS TV
subscribers, partly offset by a 0.4% decrease in total Internet
subscribers and a 4.7% decrease in total network access lines.
- Wireless ARPU was $57.38 in the fourth quarter of 2009 and $58.46 for
the full year of 2009. This reflects decreases of 7.7% and 6.8%,
respectively, from the same periods in 2008, as the decline in
wireless voice ARPU continued to exceed growth in data ARPU.
- Consolidated operating revenues in 2009 decreased by $11 million and
$47 million, respectively, in the fourth quarter and full year when
compared to the same periods in 2008. Strong price competition and
uncertainty regarding the economic recovery in Canada, described in
Section 1.2, have contributed to lower data revenue growth and
accelerated voice revenue declines.
- Operating income in 2009 decreased by $154 million and $297 million,
respectively, in the fourth quarter and full year when compared to
the same periods in 2008, primarily due to lower EBITDA, which
included higher restructuring costs (up by $39 million and
$131 million, respectively) and increased defined benefit pension
plan (DBPP) expenses (up by $30 million and $118 million,
respectively).
EBITDA in 2009 decreased by $148 million and $288 million,
respectively, in the fourth quarter and full year. When excluding
DBPP and restructuring impacts, underlying EBITDA decreased by
$79 million in the fourth quarter and decreased by $39 million for
the full year. The underlying decreases resulted from lower wireless
ARPU and higher wireless subscriber retention costs, as well as, for
the full year, higher costs for delivery of TELUS TV services and to
support implementation of services for new wireline enterprise
customers, partly offset by lower non-pension employee-related
expenditures, lower wireline advertising and promotion expenditures
and lower costs to acquire new wireless subscribers.
- Income before income taxes in 2009 decreased by $265 million and
$362 million, respectively in the fourth quarter and full year when
compared to the same periods in 2008. Lower Operating income and a
$99 million charge associated with the early partial redemption of
long-term debt in December 2009, were partly offset by $33 million
increased interest income for the full year, primarily from the
settlement of prior years' tax matters.
- Net income decreased by $129 million in both the fourth quarter and
full year of 2009 when compared to the same periods in 2008. In both
years, Net income includes income tax-related adjustments arising
from legislated income tax changes, settlements and tax reassessments
for prior years, and any related interest on reassessments (see
Section 2.2). Underlying Net income before favourable income tax-
related adjustments was approximately $77 million in the fourth
quarter and $828 million for the full year of 2009, or decreases of
$176 million and $254 million, respectively. See the analysis table
following.
- Basic earnings per share of 49 cents and $3.14, respectively, in the
fourth quarter and full year of 2009, reflect decreases of 41 cents
and 38 cents, respectively, from the same periods in 2008. Earnings
per share include favourable income tax-related adjustments of
approximately 25 cents in the fourth quarter of 2009 and 55 cents for
the full year of 2009, as compared to 10 cents and 15 cents,
respectively, in 2008. Underlying EPS before favourable income tax-
related adjustments was $2.59 in 2009 as compared to $3.37 in 2008.
EPS in the fourth quarter of 2009 also includes an approximate
22 cent unfavourable impact of the loss on early partial redemption
of long-term debt.
-------------------------------------------------------------------------
Quarters
Analysis of Net income ended Years ended
($ millions) December 31 December 31
-------------------------------------------------------------------------
Net income in 2008 285 1,131
Deduct net favourable income tax-related
adjustments in 2008 (see Section 2.2) (32) (49)
------------ ------------
253 1,082
Tax-effected changes
--------------------
Higher defined benefit pension plan expenses(1) (21) (82)
Higher restructuring charges(1) (27) (91)
Other changes in EBITDA(1)(2) (55) (28)
Changes in depreciation and amortization(1)(2) (6) (8)
Loss on redemption of long-term debt (69) (69)
Other 2 24
------------ ------------
77 828
Net favourable income tax-related adjustments
in 2009 (see Section 2.2) 79 174
------------ ------------
Net income in 2009 156 1,002
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the purposes of this presentation, the 2009 blended statutory tax
rate was used.
(2) Excluding investment tax credits that are included in income tax-
related adjustments.
-------------------------------------------------------------------------
Liquidity and capital resources highlights, including a comparison of results for the fourth quarter and full year of 2009, or measures as at
- At December 31, 2009, TELUS had unutilized credit facilities
exceeding $1.7 billion, consistent with its objective of generally
maintaining more than $1 billion of unutilized liquidity.
- Net debt to EBITDA (excluding restructuring costs) at December 31,
2009 was slightly under 2.0 times, within the Company's long-term
target policy range of 1.5 to 2.0 times.
- The dividend payout ratio for 2009 was 67%, based on the annualized
fourth quarter dividend and earnings for 2009 excluding favourable
income tax-related adjustments, the loss on redemption of long-term
debt, and minimal impact from a net-cash settlement feature. The
measure calculated based on actual 2009 earnings was 61% and based on
2010 targets for earnings per share (see Sections 1.4 and 1.5), the
payout range is 58 to 66%. This latter calculation was factored into
the Board decision to not increase the dividend level for the
declared fourth quarter 2009 dividend, following five consecutive
annual increases in the dividend rate.
On February 10, 2010, the Board of Directors declared a quarterly
dividend of 47.5 cents per share on the issued and outstanding Common
Shares and Non-Voting Shares of the Company, payable on April 1,
2010, to shareholders of record at the close of business on March 11,
2010.
- Cash provided by operating activities in 2009 decreased by
$123 million in the fourth quarter and increased by $85 million for
the full year when compared to the same periods in 2008. Changes in
securitized accounts receivable contributed comparative increases in
cash of $50 million and $400 million, respectively. This was offset
by higher paid interest of $103 million and $110 million,
respectively, in the fourth quarter and full year, primarily from the
early partial redemption of U.S. dollar Notes due June 2011 (see Cash
used by financing activities below). In addition, for the full year
of 2009, the Company commenced to make significant income tax
payments net of recoveries of $266 million.
- Cash used by investing activities in 2009 decreased by $130 million
and $1,305 million, respectively, in fourth quarter and full year,
when compared to the same periods in 2008. The decrease for the
fourth quarter was largely due to lower general capital expenditures
for wireline network access as a result of the recession, as well as
the ramp-up of HSPA spending in 2008. The decrease for the year was
largely due to payment of $882 million for AWS spectrum licences in
2008, and $670 million lower cash used for acquisitions (due to the
January 2008 acquisition of Emergis), while general capital
expenditures increased primarily for investments for wireless and
wireline broadband infrastructure to enhance the Company's
competitive position and support long-term growth. See Section 1.4
for capital expenditure expectations in 2010.
- Cash used by financing activities in 2009 was $104 million in the
fourth quarter and $739 million for the full year. Cash was used
primarily to make dividend payments and reduce long-term debt.
Financing activities included the May 2009 $700 million five-year
4.95% Note issue that facilitated a reduction in amounts drawn on the
2012 credit facility and a reduction in commercial paper. In
December, the Company extended the average term to maturity on its
long-term debt through a $1 billion 10-year 5.05% Note issue, from
which the proceeds were used primarily to early redeem 30% of its
outstanding U.S. dollar 8% Notes due June 2011 and terminate
associated cross currency interest rate swaps. In the fourth quarter
of 2008, Cash used by financing activities was $136 million, used
primarily for the payment of dividends. For the full year of 2008,
Cash provided by financing activities was $598 million, as long-term
debt increased to help fund the purchase of AWS spectrum in the third
quarter and the acquisition of Emergis in January, net of dividend
payments and repurchases of shares under a normal course issuer bid.
- Free cash flow in 2009 decreased by $96 million in the fourth quarter
and increased by $139 million for the full year when compared to the
same periods in 2008. The decrease for the quarter resulted from
higher interest paid for the early partial redemption of long-term
debt. The increase for the full year resulted mainly from the payment
for AWS spectrum last year and in 2009 higher interest received from
income tax-related settlements, partly offset by increased income tax
payments, general capital expenditures and interest paid, as well as
lower EBITDA adjusted for defined benefit plan contributions, share-
based compensation payments and restructuring payments.
1.4 Performance scorecard
Only one of the eight original consolidated and segmented public targets for 2009 was met, with capital expenditures being within 2.6% of the target of approximately
During the year, management provided revised annual 2009 guidance with each interim report, and provided final guidance in the 2010 targets call on
The following scorecard compares TELUS' 2009 results to its original targets. In addition, the targets for 2010 are presented to provide information to investors, and are fully qualified by the Caution regarding forward-looking statements at the beginning of Management's review of operations. For additional information on expectations and assumptions for 2010, see Section 1.5 Financial and operating targets for 2010.
--------------------------------------------
Scorecards Performance for 2009
-------------------------------------------------------------------------
Result: 2010 Targets
-------
+ Met
Original target
Actual Change 2009 X Missed
results from 2008 targets target
-------------------------------------------------------------------------
Consolidated
$9.606 (0.5)% $10.025 to $9.8 to
Revenues billion $10.275 billion X $10.1 billion
2 to 5%
-----------------------------------------------------------------------
EBITDA(1) $3.491 (7.6)% $3.75 to X $3.5 to
billion $3.9 billion $3.7 billion
flat to 6%
-----------------------------------------------------------------------
EPS - basic $3.14 (10.8)% n/a n/a $2.90 to $3.30
(8) to 5%
-----------------------------------------------------------------------
EPS - basic $2.81 (16.6)% $3.40 to $3.70 X $2.90 to $3.30
(excluding 3 to 17%
income
tax-related
adjustments
and loss on
redemption
of long-
term debt)
(2)(3)
-----------------------------------------------------------------------
Capital $2.103 13.1%(4) Approx. + Approx.
expend- billion $2.05 billion $1.7 billion
itures (19)%
-------------------------------------------------------------------------
Wireline segment
Revenue $4.899 (2.4)% $5.05 to X $4.85 to
(external) billion $5.175 billion $5.0 billion
(1) to 2%
-----------------------------------------------------------------------
EBITDA $1.558 (12.2)% $1.65 to X $1.575 to
billion $1.725 billion $1.675 billion
1 to 8%
-------------------------------------------------------------------------
Wireless segment
Revenue $4.707 1.6% $4.975 to X $4.95 to
(external) billion $5.1 billion $5.1 billion
5 to 8%
-----------------------------------------------------------------------
EBITDA $1.933 (3.6)% $2.1 to X $1.925 to
billion $2.175 billion $2.025 billion
flat to 5%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
n/a - not applicable.
(1) See Section 6.1 Earnings before interest, taxes, depreciation and
amortization (EBITDA) for the definition.
(2) A non-GAAP measure. For comparability purposes, excludes items
quantified in Note (3) that were not contemplated in setting targets.
(3) Excluding from 2009 actual results, 55 cents per share of positive
income-tax related adjustments and 22 cents per share for a loss on
early partial redemption of long-term debt that were not contemplated
in setting 2009 targets. Excluding positive income tax-related
adjustments of 15 cents per share in 2008 results for comparative
purposes.
(4) Compared to 2008 general capital expenditures, which exclude payment
of $882 million for AWS spectrum licences.
-------------------------------------------------------------------------
The following key assumptions were made at the time the 2009 targets were announced in
-------------------------------------------------------------------------
Assumptions for 2009
original targets Actual or estimated result for 2009
-------------------------------------------------------------------------
Ongoing wireline competition Confirmed by a major cable-TV
in both business and consumer competitor's continued digital
markets, particularly from telephone and Internet subscriber
cable-TV and voice over IP additions and increasing penetration
(VoIP) companies among business customers.
The recent recession contributed to
industry-wide pricing pressures in
2009.
-------------------------------------------------------------------------
Canadian wireless industry Estimated penetration gain for 2009 is
market penetration gain of 3.6 percentage points.
approximately 4.5 percentage
points for the year
-------------------------------------------------------------------------
Downward pressure on wireless Confirmed by the 6.8% decrease in
ARPU TELUS' blended ARPU for the year, which
is more than originally expected. See
Section 2.5 Wireless segment results.
-------------------------------------------------------------------------
New competitive wireless entry One new entrant launched service in
beginning in the fourth quarter Toronto and Calgary in December 2009,
of 2009 with most entrants and certain others are expected to
starting in 2010 launch in 2010 or have announced plans
for 2011.
-------------------------------------------------------------------------
Restructuring expenses of $190 million equal to the revised
approximately $50 million to guidance given in December 2009 to
$75 million reflect increased operational
efficiency activities (previously
revised in May, August and November
2009 to approximately $125 million,
$150 million and $160 million,
respectively).
-------------------------------------------------------------------------
A blended statutory tax rate of The blended statutory income tax rate
approximately 30 to 31% was 30.3% for the year.
-------------------------------------------------------------------------
Net payments of income tax of Income tax payments net of recoveries
approximately $320 to $350 for 2009 were $266 million, including
million final payments for 2008 and instalments
for 2009, less income tax recoveries
received in 2009 (previously revised in
August to $270 to $310 million and in
November to approximately $270
million).
-------------------------------------------------------------------------
Forecast average exchange rate The average closing exchange rate for
of U.S.$0.80 per Canadian dollar 2009 was approximately U.S.$0.88 per
Canadian dollar. Over the year, the
rate ranged between U.S.$0.770 and
U.S.$0.975. The rate at December 31,
2009, was approximately U.S.$0.95.
(Source: the Bank of Canada)
Most of 2009 capital expenditures were
priced in Canadian dollars. The Company
employs currency hedges for a varying
portion of wireless handset purchases,
as circumstances warrant. The principal
repayments and interest obligations on
the Company's U.S. dollar debt are
effectively fixed by cross currency
interest rate swap agreements.
-------------------------------------------------------------------------
A pension accounting discount The Company's defined benefit pension
rate was estimated at 7.00% plans expense was $18 million in 2009.
(subsequently set at 7.25%) and
expected long-term return of The expectation for contributions to
7.25% (consistent with the defined benefit pension plans was
Company's long-run returns and revised to approximately $191 million
its future expectations). in May 2009. Actual contributions to
Defined benefit pension plans defined benefit pension plans were
net expenses and funding were $179 million in 2009.
both estimated to increase in
2009, mainly due to the decline
in value of defined benefits
pension plans assets in 2008.
- Defined benefit pension plans
net expenses were estimated to
be $nil(1) in 2009,
subsequently revised to
approximately $18 million(2)
- Defined benefit pension plans
contributions were estimated
to be approximately $200
million(1) for 2009,
subsequently revised to
$211 million(2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) December 16, 2008.
(2) Management's discussion and analysis for 2008, dated February 11,
2009.
-------------------------------------------------------------------------
1.5 Financial and operating targets for 2010
The following assumptions apply to TELUS' 2010 targets presented in Scorecards in the previous section. The 2010 targets and assumptions were originally announced on
For 2010, TELUS has targeted consolidated revenue of
Wireline revenue is expected to change between (1)% and 2% in 2010, reflecting data growth in business services and residential entertainment services, largely offset by continued decreases in legacy local and long distance services. Wireline EBITDA is expected to increase by 1 to 8% as a result of modest revenue growth, increased savings from ongoing efficiency initiatives and lower restructuring costs, partly offset by the increased costs from strong TELUS TV subscriber growth.
TELUS wireless revenue is forecast to increase 5 to 8% in 2010 largely dependent on the extent of growth in wireless subscriber loading and ARPU performance. Growth in wireless loading is expected to benefit from an increase in industry growth with a penetration gain of approximately 4%. TELUS expects to benefit from a full year effect of its new 3G+ network, increased data and roaming revenues helping offset continued declines in voice ARPU and the effects of new competitive entry. Wireless EBITDA is expected to be flat to 5% higher in 2010, despite the impact on margins of increased subsidies from higher volumes of smartphone sales for both new and existing clients.
Capital expenditures in 2010 are forecast to return to more historical levels at approximately
-------------------------------------------------------------------------
Assumptions for 2010 targets
-------------------------------------------------------------------------
Ongoing wireline and wireless competition in both business and consumer
markets
-------------------------------------------------------------------------
Canadian wireless industry market penetration gain of approximately four
percentage points for the year (approximately 3.6 percentage points in
2009)
-------------------------------------------------------------------------
Increased wireless subscriber loading in smartphones
-------------------------------------------------------------------------
Reduced downward pressure on wireless ARPU
-------------------------------------------------------------------------
New competitive wireless entry in early 2010 following one competitive
launch in December 2009
-------------------------------------------------------------------------
In wireline, stable residential network access line losses and continued
competitive pressure in small and medium business market from cable-TV
and VoIP companies
-------------------------------------------------------------------------
Continued wireline broadband expansion
-------------------------------------------------------------------------
Significant increase in cost of acquisition and retention expenses for
smartphones and TELUS TV loading
-------------------------------------------------------------------------
EBITDA savings of approximately $135 million from efficiency initiatives
-------------------------------------------------------------------------
Approximately $75 million of restructuring expenses ($190 million in
2009)
-------------------------------------------------------------------------
A blended statutory tax rate of approximately 28.5 to 29.5% (30.3% in
2009). The expected decrease is based on enacted changes in federal and
provincial income tax rates.
-------------------------------------------------------------------------
Cash income taxes peaking at approximately $385 to $425 million (net
$266 million in 2009) due to the timing of instalment payments.
-------------------------------------------------------------------------
A pension accounting discount rate was estimated at 5.75% and
subsequently set at 5.85% (140 basis points lower than 2009). The
expected long-term return of 7.25% is unchanged from 2009 and consistent
with the Company's long-run returns and its future expectations.
- Defined benefit pension plans net expenses were estimated to be
$47 million(1) in 2010 and subsequently estimated to be $28 million
(compared to $18 million in 2009), based on projected pension fund
returns.
- Defined benefit pension plans contributions were estimated to be
approximately $147 million(1) in 2010, and subsequently estimated to
be $143 million, down from $179 million in 2009, largely due to the
stock market recovery in 2009 and proposed federal pension reforms.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) December 15, 2009.
-------------------------------------------------------------------------
2. Discussion of operations
The discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of Management's review of operations.
2.1 General
The Company has two reportable segments: wireline and wireless. Segmentation is based on similarities in technology, the technical expertise required to deliver the products and services, customer characteristics, the distribution channels used and regulatory treatment. Intersegment sales are recorded at the exchange value. Segmented information is regularly reported to the Company's Chief Executive Officer (the chief operating decision-maker).
2.2 Summary of quarterly results
-------------------------------------------------------------------------
($ in millions, except per 2009 2009 2009 2009
share amounts) Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Operating revenues 2,443 2,411 2,377 2,375
Operations expenses 1,577 1,456 1,451 1,441
Restructuring costs 77 32 53 28
-------------------------------------------------------------------------
EBITDA(1) 789 923 873 906
Depreciation 347 330 330 334
Amortization of intangible assets 94 100 94 93
-------------------------------------------------------------------------
Operating income 348 493 449 479
Other expense 10 6 11 5
Financing costs 230 101 106 95
-------------------------------------------------------------------------
Income before income taxes 108 386 332 379
Income taxes (recovery) (48) 106 88 57
-------------------------------------------------------------------------
Net income 156 280 244 322
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income attributable to Common
Shares and Non-Voting Shares 155 279 243 321
Income per Common Share and
Non-Voting Share - basic 0.49 0.88 0.77 1.01
- diluted 0.49 0.87 0.77 1.01
Cash dividends declared per Common
Share and Non-Voting Share 0.475 0.475 0.475 0.475
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($ in millions, except per 2008 2008 2008 2008
share amounts) Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Operating revenues 2,454 2,450 2,399 2,350
Operations expenses 1,479 1,465 1,477 1,394
Restructuring costs 38 10 4 7
-------------------------------------------------------------------------
EBITDA(1) 937 975 918 949
Depreciation 351 344 343 346
Amortization of intangible assets 84 92 77 76
-------------------------------------------------------------------------
Operating income 502 539 498 527
Other expense 11 6 2 17
Financing costs 118 122 114 109
-------------------------------------------------------------------------
Income before income taxes 373 411 382 401
Income taxes (recovery) 88 125 114 109
-------------------------------------------------------------------------
Net income 285 286 268 292
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income attributable to Common
Shares and Non-Voting Shares 285 285 267 291
Income per Common Share and
Non-Voting Share - basic 0.90 0.89 0.83 0.90
- diluted 0.89 0.89 0.83 0.90
Cash dividends declared per Common
Share and Non-Voting Share 0.475 0.45 0.45 0.45
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure. See Section 6.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
-------------------------------------------------------------------------
Trends
The recent economic downturn led to spending restraint and deferral of purchases, as well as heightened consumer and business customers' focus on value and increased expectations for better pricing and packaging of services. The consolidated revenue trend reflects lower year-over-year growth in wireless network revenue, including a 1.7% decrease in the fourth quarter of 2009. Wireless blended ARPU for the fourth quarter of 2009 decreased by 7.7% year-over-year, as growth in data ARPU moderated from increased adoption of data plans and use of mobile Internet keys, and was more than offset by declining voice ARPU. The voice ARPU decline in order of importance includes pricing competition, greater spending restraint and price optimization on the part of customers, increased use of in-bucket or included-minute service plans, continued decline in Mike service ARPU, lower roaming revenues and the growing base of Koodo postpaid basic subscribers.
The expected entry of a number of new wireless competitors in 2010 and 2011 may disrupt usual seasonal patterns for wireless subscriber additions in the future. Historically, there has been significant fourth quarter seasonality with respect to higher wireless subscriber additions, related acquisition costs and equipment sales, resulting in lower fourth quarter wireless EBITDA. The third quarter has become more significant in terms of subscriber additions in recent years as a result of back-to-school offers, while subscriber additions have typically been lowest in the first quarter. In addition, wireless ARPU has generally risen sequentially in the second and third quarters, and declined sequentially in the fourth and first quarters.
Consolidated revenues also continue to reflect growth in wireline data revenue, however, data revenue growth has moderated in 2009 due to the recession and strong price competition, and was more than offset by declining wireline legacy voice local and long distance revenues. The decline in wireline voice revenues is due to substitution to wireless and Internet services, as well as competition from VoIP service providers (including cable-TV competitors), resellers and facilities-based competitors. Residential network access line (NAL) losses have moderated over the five most recent quarters because of more effective winback efforts and synergies from bundling services, while TELUS' main cable-TV competitor's digital telephone geographic coverage expansion slowed. The Company has observed a larger number of disconnections and fewer installations of business NALs attributed partly to economic conditions and partly to competition.
The sequential and year-over-year increase in fourth quarter 2009 consolidated operations expense primarily reflects higher wireless retention costs associated with migration to smartphones and addition of expenses from Black's Photo since its acquisition in
The sequential increase in depreciation expense in the fourth quarter of 2009 resulted from growth in capital assets in service including the wireless HSPA network launched in November. The sequential decline in depreciation in the first quarter of 2009 was due to certain assets becoming fully depreciated in 2008.
Amortization in the fourth quarter of 2009 was reduced by application of approximately
Financing costs in the fourth quarter of 2009 include a
The trends in Net income and earnings per share (EPS) reflect the items noted above, as well as adjustments arising from legislated income tax changes, settlements and tax reassessments for prior years, including any related interest on reassessments. EPS was also positively impacted by decreased shares outstanding from share repurchases in 2008.
-------------------------------------------------------------------------
Income tax-related adjustments 2009 2009 2009 2009
($ in millions, except EPS amounts) Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Approximate Net income impact 79 14 19 62
Approximate EPS impact 0.25 0.04 0.06 0.20
Approximate basic EPS excluding
income tax-related impacts 0.24 0.84 0.71 0.81
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income tax-related adjustments 2008 2008 2008 2008
($ in millions, except EPS amounts) Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Approximate Net income impact 32 - - 17
Approximate EPS impact 0.10 - - 0.05
Approximate basic EPS excluding
income tax-related impacts 0.80 0.89 0.83 0.85
-------------------------------------------------------------------------
2.3 Consolidated operations
-------------------------------------------------------------------------
($ in millions, except Quarters ended Years ended
EBITDA margin) December 31 December 31
2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Operating revenues 2,443 2,454 (0.4)% 9,606 9,653 (0.5)%
Operations expenses 1,577 1,479 6.6 % 5,925 5,815 1.9 %
Restructuring costs 77 38 102.6 % 190 59 n/m
-------------------------------------------------------------------------
EBITDA(1) 789 937 (15.8)% 3,491 3,779 (7.6)%
Depreciation 347 351 (1.1)% 1,341 1,384 (3.1)%
Amortization of
intangible assets 94 84 11.9 % 381 329 15.8 %
-------------------------------------------------------------------------
Operating income 348 502 (30.7)% 1,769 2,066 (14.4)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA margin (%)(2) 32.3 38.2 (5.9)pts 36.3 39.1 (2.8)pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBITDA is a non-GAAP measure. See Section 6.1 Earnings before
interest, taxes, depreciation and amortization (EBITDA).
(2) EBITDA divided by Operating revenues.
-------------------------------------------------------------------------
Discussion of TELUS' consolidated operations follows. Segmented discussion is provided in Section 2.4 Wireline segment, Section 2.5 Wireless segment and Section 4.2 Cash used by investing activities - capital expenditures.
Operating revenues
Consolidated Operating revenues in 2009 decreased by
Operations expense
Operations expense in 2009 increased by
-------------------------------------------------------------------------
Quarters ended Years ended
December 31 December 31
($ millions) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Salaries, benefits
except DBPP(1),
and employee-
related expenses 605 607 (0.3)% 2,375 2,549 (6.8)%
DBPP expense (recovery) 5 (25) n/m 18 (100) n/m
Other operations
expenses 967 897 7.8 % 3,532 3,366 4.9 %
-------------------------------------------------------------------------
1,577 1,479 6.6 % 5,925 5,815 1.9 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) DBPP - defined benefit pension plans.
-------------------------------------------------------------------------
In respect of changes in operations expenses in the fourth quarter and full year of 2009:
- Salaries, benefits (except DBPP benefits) and employee-related
expenses decreased by $2 million and $174 million, respectively. The
decreases were mainly from lower performance bonus expenses arising
from lower than originally planned operating performance, as well as
a decrease in domestic full-time equivalent (FTE) employees in 2009,
while management base salaries were frozen at 2008 levels. The
decrease for the quarter was affected by the timing of performance
bonus accruals in 2008, as it became clear that annual performance
objectives were not likely to be met.
- TELUS' defined benefit pension plans expense increased by $30 million
and $118 million, respectively, mainly due to the decline in value of
defined benefit pension plans assets in 2008.
- Other operations expenses increased by $70 million and $166 million,
respectively. The increases included higher wireless subscriber
retention costs, higher full year wireless network costs from
increasing smartphone adoption, increased wireline TELUS TV
programming and customer acquisition costs in the quarter and full
year, and higher full year costs to implement services for new
wireline enterprise customers. These increases were partly offset by
lower wireless roaming costs and lower annual expenses for wireless
marketing and wireline advertising and promotions. Wireless bad debt
expense decreased by $7 million in the fourth quarter, but increased
$10 million for the year.
Restructuring costs
Restructuring costs in 2009 were
EBITDA
Consolidated EBITDA in 2009 decreased by
Depreciation; Amortization of intangible assets
Combined depreciation and amortization expenses in 2009 increased by
- Depreciation decreased by $4 million and $43 million, respectively.
This reflects accelerated depreciation during 2008 from a reduction
in estimated useful service lives for certain digital switching
assets, as well as certain digital cell sites becoming fully
depreciated. This was offset by growth in capital assets over the
year.
- Amortization increased by $10 million and $52 million, respectively.
This includes approximately $18 million for the year from the July
2008 implementation of the converged wireline billing and client care
platform in B.C. The balance is mainly due to increases in other
administrative and network application software including that
supporting the November 2009 launch of the HSPA network.
- The Company completed its annual impairment testing for goodwill and
intangible assets in December, and it was determined that there were
no impairments.
Operating income
Operating income in 2009 decreased by
Other income statement items
-------------------------------------------------------------------------
Quarters ended Years ended
Other expense, net December 31 December 31
($ millions) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
10 11 (9.1)% 32 36 (11.1)%
-------------------------------------------------------------------------
Other expense, net includes accounts receivable securitization expense, income (losses) or impairments in equity or portfolio investments, gains and losses on disposal of real estate, and charitable donations.
Accounts receivable securitization expenses in 2009 were approximately
-------------------------------------------------------------------------
Quarters ended Years ended
Financing costs December 31 December 31
($ millions) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Interest on long-term
debt, short-term
obligations and other 131 128 2.3 % 483 481 0.4 %
Foreign exchange
(gains) losses - - n/m (3) (1) n/m
Loss on redemption
of long-term debt 99 - n/m 99 - n/m
-------------------------------------------------------------------------
230 128 79.7 % 579 480 20.6 %
Capitalized interest
during construction - - n/m - (3) n/m
Interest income
(tax refunds) - (8) n/m (46) (9) n/m
Interest income (other) - (2) n/m (1) (5) n/m
-------------------------------------------------------------------------
230 118 94.5 % 532 463 14.9 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expenses on long-term and short-term debt and other in 2009 increased by
In
Interest income on tax refunds was related to the settlement of prior years' tax matters, while other interest income was primarily from cash balances and temporary investments.
-------------------------------------------------------------------------
Income taxes (recovery) Quarters ended Years ended
($ millions, except December 31 December 31
tax rates) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Basic blended federal
and provincial tax
at statutory income
tax rates 34 116 (70.7)% 366 486 (24.7)%
Revaluation of future
income tax liability
to reflect future
statutory income
tax rates (63) (9) - (99) (41) -
Tax rate differential
on, and consequential
adjustments from,
reassessments of
prior years' tax
issues (20) (20) - (68) (21) -
Share option award
compensation 1 2 - 4 6 -
Other - (1) - - 6 -
-------------------------------------------------------------------------
(48) 88 n/m 203 436 (53.4)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Blended federal and
provincial statutory
tax rates (%) 31.5 31.2 0.3 pts 30.3 31.0 (0.7)pts
Effective tax
rates (%) n/m 23.5 n/m 16.8 27.8(11.0)pts
-------------------------------------------------------------------------
Basic blended statutory income taxes in 2009 decreased in the fourth quarter and full year when compared to 2008, due to lower income before taxes, and lower full-year blended statutory tax rates. The effective tax rates in both years were lower than the statutory tax rates due to the tax rate differential and consequential adjustments from reassessments of prior years' tax issues, revaluations of future income tax liabilities resulting from reductions to future B.C. and Ontario provincial income tax rates, as well as future tax rates being applied to temporary differences. Changes to future B.C. income tax rates were enacted in the first quarter of 2009, reducing rates beginning
-------------------------------------------------------------------------
Other comprehensive
income Quarters ended Years ended
($ millions, except December 31 December 31
tax rates) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
33 (17) n/m 58 (26) n/m
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other comprehensive income includes changes in unrealized fair value of derivatives designated as cash flow hedges, principally associated with U.S. dollar debt. The early partial redemption of U.S. dollar Notes in
2.4 Wireline segment
-------------------------------------------------------------------------
Operating revenue - Quarters ended Years ended
wireline segment December 31 December 31
($ millions) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Voice local 450 480 (6.3)% 1,856 1,973 (5.9)%
Voice long distance 142 173 (17.9)% 619 700 (11.6)%
Data 554 528 4.9 % 2,146 2,072 3.6 %
Other 72 85 (15.3)% 278 276 0.7 %
-------------------------------------------------------------------------
External operating
revenue 1,218 1,266 (3.8)% 4,899 5,021 (2.4)%
Intersegment revenue 36 35 2.9 % 134 131 2.3 %
-------------------------------------------------------------------------
Total operating
revenue 1,254 1,301 (3.6)% 5,033 5,152 (2.3)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total wireline segment revenue in 2009 decreased by
- Voice local revenue in 2009 decreased by $30 million and
$117 million, respectively, for the quarter and full year. Decreases
were mainly due to lower revenues from basic access and enhanced
voice services caused by competition for residential subscribers, the
consequent decline in local residential access lines and matching of
competitive offers, as well as decreases in business lines from
economic impacts and competitor activity including price competition.
Wireline operating indicators
-------------------------------------------------------------------------
Network access lines (NALs) As at December 31
(000s) 2009 2008 Change
-------------------------------------------------------------------------
Residential 2,238 2,402 (6.8)%
Business 1,810 1,844 (1.8)%
-------------------------------------------------------------------------
Total 4,048 4,246 (4.7)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net (losses) additions Quarters ended Years ended
in NALs December 31 December 31
(000s) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Residential (41) (42) 2.4 % (164) (194) 15.5 %
Business (11) 6 n/m (34) 36 n/m
-------------------------------------------------------------------------
Total (52) (36) (44.4)% (198) (158) (25.3)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
There were fewer residential NAL losses in 2009 when compared to 2008
because of more effective winback efforts and synergy with bundled
services including TELUS TV, as well as slowing of a cable-TV
competitor's geographic expansion of digital telephone service. The
decrease in business NALs during these periods reflects competitive
inroads in the small and medium business market by cable-TV
companies, as well as economic impacts leading to a larger number of
disconnections and fewer installations, particularly in B.C. and
Alberta. Business NALs increased in Ontario and Quebec in 2009. In
addition, growth in certain data services, such as private networks,
is not measured by business NAL counts, and conversion of legacy
voice services to IP services results in an overall decrease in
business NALs.
- Voice long distance revenue in 2009 decreased by $31 million and
$81 million, respectively, for the quarter and full year. The
decreases were due mainly to lower average per-minute rates resulting
from ongoing industry-wide price competition, a lower base of
subscribers, and lower billed retail minute volumes.
- Wireline data revenues in 2009 increased by $26 million and
$74 million, respectively, for the quarter and full year. The
increase included: (i) subscriber growth in digital entertainment
services; (ii) increased Internet, enhanced data and hosting
services, partly offset by lower average pricing from competitive
pressures; and (iii) higher managed workplace revenues from growth in
outsourcing services for business customers. For the full-year, these
increases were partly offset by lower broadcast and videoconferencing
revenues and lower data equipment sales, including the effect of a
large equipment sale in the first quarter of 2008.
Wireline operating indicators
-------------------------------------------------------------------------
Internet and TELUS
TV subscribers As at December 31
(000s) 2009 2008 Change
-------------------------------------------------------------------------
High-speed Internet subscribers(1) 1,128 1,096 2.9 %
Dial-up Internet subscribers 87 124 (29.8)%
-------------------------------------------------------------------------
Total Internet subscribers(1) 1,215 1,220 (0.4)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS TV subscribers(2) 170 78 117.9 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net additions (losses)
of Internet and TELUS Quarters ended Years ended
TV subscribers December 31 December 31
(000s) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
High-speed Internet
subscriber net
additions(1) 11 19 (42.1)% 37 76 (51.3)%
Dial-up Internet
subscriber net losses (9) (10) 10.0 % (37) (31) (19.4)%
-------------------------------------------------------------------------
Total Internet
subscriber net
additions(1) 2 9 (77.8)% - 45 (100.0)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TELUS TV subscriber
net additions(2) 33 15 120.0 % 92 43 114.0 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Opening balances for high-speed Internet subscribers and total
Internet subscribers for the second quarter of 2009, were reduced by
five thousand to reflect prior period reporting adjustments.
(2) Includes TELUS Satellite TV(TM) subscribers beginning in 2009.
-------------------------------------------------------------------------
High-speed Internet subscriber net additions in 2009 were lower than
the net additions in 2008, due to a maturing market and a decline in
household formation, as well as cable-TV competitors' expanded
product offerings, promotional pricing and winback offers. TELUS TV
service subscriptions more than doubled in 2009, as the Company
continues to improve installation capability, rolled out high-
definition TV channels and PVRs, increased geographic coverage,
introduced TELUS Satellite TV service and had success with bundled
offers.
- Other revenue in 2009 decreased by $13 million in the fourth quarter
and increased by $2 million for the full year, primarily due to
changes in voice equipment sales.
- Intersegment revenue represents services provided by the wireline
segment to the wireless segment and is eliminated upon consolidation
together with the associated expense in the wireless segment.
-------------------------------------------------------------------------
Operating expenses - Quarters ended Years ended
wireline segment December 31 December 31
($ millions) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Salaries, benefits
except DBPP(1)
expense (recovery),
and employee-
related costs 450 466 (3.4)% 1,792 1,944 (7.8)%
DBPP expense (recovery) 6 (23) n/m 20 (91) n/m
Other operations
expenses 370 381 (2.9)% 1,485 1,474 0.7 %
-------------------------------------------------------------------------
Operations expenses 826 824 0.2 % 3,297 3,327 (0.9)%
Restructuring costs 74 32 131.3 % 178 51 n/m
-------------------------------------------------------------------------
Total operating
expenses 900 856 5.1 % 3,475 3,378 2.9 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) DBPP - defined benefit pension plans.
-------------------------------------------------------------------------
Total operating expenses in 2009 increased by
- Salaries, benefits and employee-related costs decreased by
$16 million and $152 million, respectively, in the quarter and full
year. The decreases resulted from a significant reduction in
performance bonus expenses from lower than originally planned
operating performance for 2009, fewer domestic FTE staff and
efficiency initiatives including those targeting discretionary
employee-related expenses such as travel. The decrease for the
quarter was affected by the timing of performance bonus accruals in
2008, as it became clear that annual performance objectives were not
likely to be met.
- The defined benefit pension plans expense increased by $29 million
and $111 million, respectively, in the quarter and full year, mainly
due to the decline in value of these plans' assets in 2008.
- Other operations expenses decreased by $11 million in the fourth
quarter and increased by $11 million for the full year. The decrease
for the quarter was primarily costs associated with lower equipment
sales, and lower transit and termination costs resulting from lower
outbound long distance minute volumes, partly offset by increases in
TELUS TV programming and customer acquisition costs. The increase for
the full year was due to TELUS TV programming and customer
acquisition costs related to increased subscriber loading, and access
facility costs associated with implementing new contracts, partly
offset by lower advertising and promotional expenses and lower
transit and termination expenses.
- Restructuring costs increased by $42 million and $127 million,
respectively, in the quarter and full year, reflecting an array of
initiatives under the Company's accelerated operating efficiency
program.
-------------------------------------------------------------------------
Wireline segment - Quarters ended Years ended
EBITDA December 31 December 31
2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 354 445 (20.4)% 1,558 1,774 (12.2)%
EBITDA margin (%) 28.2 34.2 (6.0)pts 31.0 34.4 (3.4)pts
-------------------------------------------------------------------------
Wireline segment EBITDA in 2009 decreased by
2.5 Wireless segment
-------------------------------------------------------------------------
Operating revenue - Quarters ended Years ended
wireless segment December 31 December 31
($ millions) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Network revenue 1,103 1,122 (1.7)% 4,392 4,369 0.5 %
Equipment and other
revenue 122 66 84.8 % 315 263 19.8 %
-------------------------------------------------------------------------
External operating
revenue 1,225 1,188 3.1 % 4,707 4,632 1.6 %
Intersegment revenue 7 7 - % 28 28 - %
-------------------------------------------------------------------------
Total operating
revenue 1,232 1,195 3.1 % 4,735 4,660 1.6 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Wireless segment revenue in 2009 increased by
- Network revenue in 2009 decreased by $19 million in quarter and
increased by $23 million for the full year. Data revenue growth of
$40 million or 20% in the fourth quarter moderated as a result of
increased adoption of data plans and lower data roaming rates, and
was more than offset by a decline in voice revenues of $59 million or
6%. Data revenue growth of $207 million or 30% for the full year was
partially offset by lower voice revenues of $184 million or 5%.
Wireless data revenue as a proportion of network revenue is 22% and
20%, respectively, in the fourth quarter and full year of 2009, as
compared to 18% and 16% respectively in the same periods of 2008. The
growth in data revenues continues to reflect strength in text
messaging and smartphone service revenues driven by increased
penetration of smartphones, increased adoption of data plans, higher-
speed HSPA and EVDO-capable handsets, and mobile Internet keys,
partially offset by lower inbound data roaming rates.
Fourth quarter 2009 blended ARPU was $57.38, a decrease of $4.78 or
7.7% when compared to the same period in 2008, and reflecting the
usual seasonal decline when compared to $59.45 in the third quarter
of 2009. Blended ARPU of $58.46 for the full year of 2009 decreased
by $4.27 or 6.8% when compared to 2008.
Fourth quarter 2009 data ARPU was $12.60, an increase of $1.43 or 13%
when compared to the same period in 2008, while full year data ARPU
was $11.88, or an increase of $2.04 or 21%. Moderation in the rate of
growth of data ARPU resulted from increased adoption of data plans
and mobile Internet keys, as well as lower roaming rates. In
contrast, fourth quarter voice ARPU of $44.78 decreased $6.21 or 12%,
while full year voice ARPU of $46.58 decreased $6.31 or 12%.
Declining voice ARPU is a continuing trend and includes a combination
of factors: declining minutes of use by both consumers and
businesses, increased use of included-minute rate plans as
subscribers shift usage patterns and move to optimize price plans
(including the elimination of system access fees and carrier 911
charges on new rate plans launched in November 2009 that are only
partly compensated for by a $5 monthly increase), lower Mike service
ARPU, increased penetration of the Koodo brand supporting network
revenue and subscriber growth, and decreased inbound roaming rates,
partly offset by higher service feature revenues.
While gross subscriber additions decreased by two to three per cent
in the fourth quarter and full year of 2009, an improvement in the
postpaid/prepaid mix of gross and net subscribers was observed.
Postpaid subscriber gross additions represented approximately 66% of
total gross additions for the fourth quarter of 2009 and 65% of total
gross additions for the full year. This compares to 63% and 64%,
respectively, in the same periods in 2008. For net subscriber
additions, postpaid represented 89% and 93%, respectively, of total
net additions for the fourth quarter and full year of 2009, as
compared to 80% and 86%, respectively, in the same periods of 2008.
Net additions for the fourth quarter and full year of 2009 were down
18% and 31%, respectively, when the full year comparatives for 2008
are normalized for the deactivation of 28,000 subscribers on
September 15, 2008 from the turndown of TELUS' analogue network. Net
additions reflect a 55% reduction in prepaid net additions in the
quarter (67% for the year) as the Company shifted focus away from
this lower value segment. Net additions in 2009 were impacted by
slower industry growth, as well as slightly higher overall churn and
market competition as compared to normalized net additions in 2008.
The blended churn rate for the fourth quarter of 2009 was stable at
1.60% when compared to the same period in 2008 resulting from
improved churn in the Koodo brand and prepaid market segment, offset
by continued overall competitive marketing intensity. The full year
blended churn rate of 1.58% in 2009 increased from 1.52% in 2008
(when 2008 is normalized to exclude deactivation of analogue
subscribers in September of that year). The increased churn reflects
higher involuntary churn as a result of the recession, lower prior
year churn in the Koodo brand due to its initial launch in March
2008, and continued competitive marketing intensity within both the
postpaid and prepaid market segments.
Wireless operating indicators
-------------------------------------------------------------------------
As at December 31
2009 2008 Change
-------------------------------------------------------------------------
Subscribers (000s)
Postpaid(1) 5,290 4,922 7.5 %
Prepaid 1,234 1,207 2.2 %
-------------------------------------------------------------------------
Total(1) 6,524 6,129 6.4 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Proportion of subscriber base that
is postpaid (%) 81.1 80.3 0.8 pts
Digital POPs(2) covered (millions)(3) 33.1 32.6 1.5 %
HSPA POPs covered (millions)(3) greater
than 31.0 - n/m
Quarters ended Years ended
December 31 December 31
2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Subscriber gross
additions (000s)
Postpaid 283 279 1.4 % 1,036 1,062 (2.4)%
Prepaid 148 162 (8.6)% 563 593 (5.1)%
-------------------------------------------------------------------------
Total 431 441 (2.3)% 1,599 1,655 (3.4)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Subscriber net
additions (000s)
Postpaid 109 119 (8.4)% 379 481 (21.2)%
Prepaid 13 29 (55.2)% 27 80 (66.3)%
-------------------------------------------------------------------------
Total(4) 122 148 (17.6)% 406 561 (27.8)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total subscriber net
additions - adjusted(4) - - - 406 588 (31.0)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ARPU(5) ($) 57.38 62.16 (7.7)% 58.46 62.73 (6.8)%
Churn, per
month(5) (%) 1.60 1.62 (0.02)pts 1.58 1.57 0.01 pts
Adjusted churn,
per month (%)(4) - - - 1.58 1.52 0.06 pts
Average monthly
minutes of use per
subscriber (MOU) 389 412 (5.6)% 392 411 (4.6)%
COA(6) per gross
subscriber
addition(5)(7) ($) 380 372 2.2 % 337 351 (4.0)%
Retention spend to
network
revenue(5)(7) (%) 12.1 9.4 2.7 pts 10.9 8.9 2.0 pts
EBITDA excluding
COA ($ millions) 598 656 (8.8)% 2,472 2,587 (4.4)%
EBITDA to network
revenue (%) 39.4 43.9 (4.5)pts 44.0 45.9 (1.9)pts
-------------------------------------------------------------------------
-------------------------------------------------------------------------
pts. - percentage points
(1) The opening balance for postpaid and total subscribers was reduced by
approximately 11,000 in the fourth quarter of 2009 to reflect prior
period reporting adjustments.
(2) POPs is an abbreviation for population. A POP refers to one person
living in a population area that is wholly or substantially included
in the coverage area.
(3) Including roaming/resale agreements, principally with Bell Canada.
(4) Net additions and blended churn in 2008 include the impact of TELUS'
analogue network turndown on September 15, 2008. Adjusted subscriber
net additions and churn exclude the impact of approximately 28,000
subscriber deactivations resulting from turning down the analogue
network.
(5) See Section 6.3 Definitions of key wireless operating indicators.
These are industry measures useful in assessing operating performance
of a wireless company, but are not measures defined under Canada or
U.S. GAAP.
(6) Cost of acquisition.
(7) In 2009, the Company refined the measurement of the costs of
acquisition and retention in its operational systems to align with
changes in the business. Comparative figures for 2008 have been
restated on a consistent basis.
-------------------------------------------------------------------------
- Equipment sales, rental and service revenue in 2009 increased by $56
million in the fourth quarter and increased by $52 million for the
full year, when compared to the same periods in 2008, largely due to
inclusion of revenues from Black's Photo since its acquisition in
September 2009 ($38 million for the fourth quarter; $44 million for
the year). Additionally, increases were due to higher per-unit
revenues from an increasing smartphone mix (including, notably, the
Apple iPhone commencing in early November) and higher retention
volumes, and to a lesser extent, higher accessory revenues, partly
offset by lower acquisition volumes.
- Intersegment revenue represents services provided by the wireless
segment to the wireline segment and is eliminated upon consolidation
along with the associated expense in the wireline segment.
-------------------------------------------------------------------------
Operating expenses - Quarters ended Years ended
wireless segment December 31 December 31
($ millions) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Equipment sales
expenses 263 198 32.8 % 845 720 17.4 %
Network operating
expenses 156 158 (1.3)% 621 603 3.0 %
Marketing expenses 130 124 4.8 % 422 470 (10.2)%
General and
administration
(G&A) expenses
Salaries, benefits(1)
and employee-
related costs 154 139 10.8 % 581 596 (2.5)%
Other G&A expenses 91 78 16.7 % 321 258 24.4 %
-------------------------------------------------------------------------
Operations expense 794 697 13.9 % 2,790 2,647 5.4 %
Restructuring costs 3 6 (50.0)% 12 8 50.0 %
-------------------------------------------------------------------------
Total operating
expenses 797 703 13.4 % 2,802 2,655 5.5 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes defined benefit pension plans recoveries of $1 million and
$2 million, respectively, for the fourth quarter and full year of
2009, as compared to recoveries of $2 million and $9 million,
respectively, for the fourth quarter and full year of 2008.
-------------------------------------------------------------------------
Wireless segment total operating expenses in 2009 increased by
- Equipment sales expenses in 2009 increased by $65 million and
$125 million, respectively. The increases were due in part to higher
retention volumes and higher per-unit costs to support migration of
clients to smartphones (including the Apple iPhone commencing in
early November 2009), as well as higher inventory valuation
adjustments, partly offset by lower acquisition volumes. This
category includes results from Black's since September 2009.
- Network operating expenses in 2009 decreased by $2 million in the
fourth quarter and increased by $18 million for the full year. The
decrease for the quarter reflected lower roaming costs from reduced
rates, partly offset by higher costs related to the new HSPA network,
as well as those from higher penetration of smartphones that drove
increases in revenue share costs to certain third parties and
licensing costs to service providers. The increase in expenses for
the full year similarly supported the high growth in data revenues
that drove increases in revenue share costs and licensing costs to
service providers, partly offset by lower roaming costs from reduced
rates.
- Marketing expenses increased by $6 million in the quarter and
decreased by $48 million for the full year. The increase for the
quarter reflects higher advertising and promotions costs related in
part to the new 3G+ network launch in November 2009, partly offset by
lower commissions as a result of lower acquisition volumes. Fourth
quarter COA per gross subscriber addition increased by $8 compared to
the same period in 2008 due to higher advertising and promotions
costs, and higher per-unit subsidies associated with smartphones,
partly offset by lower commissions due to a change in product mix and
loading through lower variable cost channels. The full year decrease
in marketing expense resulted from lower commissions, and to a lesser
extent lower advertising and promotions costs. COA per gross
subscriber addition decreased by $14 in 2009 when compared to 2008,
which reflects lower commissions, partly offset by higher per-unit
subsidy costs including changes in promotional pricing and a higher
smartphone mix.
Retention costs as a percentage of network revenue increased to 12.1%
and 10.9% in the fourth quarter and full year of 2009. The increases
reflect higher retention costs primarily related to higher retention
volumes from a larger subscriber base, higher per-unit subsidy costs
as part of a continued focus on the migration of clients to
smartphones including additional volumes as clients upgrade to HSPA
devices. The impact of the iPhone and other new smartphone devices is
expected to positively impact future subscriber loading, data revenue
and ARPU, while increasing network usage from higher data volumes and
increasing future costs of retention.
- In 2009, G&A expenses, salaries, benefits and employee-related costs
increased by $15 million in the fourth quarter and decreased by
$15 million for the full year. The increase in the fourth quarter was
primarily a result of the inclusion in 2009 of expenses from Black's.
The full year decrease reflects overall lower 2009 performance bonus
accruals and traction from efficiency initiatives. Other G&A expenses
in 2009 increased by $13 million and $63 million, respectively,
including higher external labour costs to support the increased
subscriber base, higher rent from the expansion of Koodo distribution
channels and the inclusion of expenses from Black's. Bad debt expense
decreased $7 million in the quarter, but increased by $10 million for
the year.
- Restructuring costs included various initiatives due to the
competitive efficiency program.
-------------------------------------------------------------------------
Wireless segment - Quarters ended Years ended
EBITDA December 31 December 31
2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
EBITDA ($ millions) 435 492 (11.6)% 1,933 2,005 (3.6)%
EBITDA margin (%) 35.3 41.2 (5.9)pts 40.8 43.0 (2.2)pts
-------------------------------------------------------------------------
Wireless segment EBITDA in 2009 decreased by
3. Changes in financial position
Changes in the Consolidated statements of financial position for the year ended
-------------------------------------------------------------------------
Financial
position
as at: December 31, Changes Explanation
($ millions) 2009 2008 of the change
-------------------------------------------------------------------------
Current Assets
Cash and 41 4 37 n/m See Section 4:
temporary Liquidity and capital
investments, resources
net
Accounts 694 966 (272) (28)% Reduced by a $200
receivable million increase in
proceeds from
securitized accounts
receivable, as well
as lower wireline
revenue and a
decrease in wireless
customer accounts
receivable due to a
decrease in postpaid
ARPU. Accounts
receivable turnover
was 46 days at
December 31, 2009
compared to 48 days
at December 31, 2008.
Income and 16 25 (9) (36)% Reflects refunds
other taxes received net of an
receivable increase in accrued
income and other
taxes receivable.
Inventories 270 397 (127) (32)% Mainly a decrease in
wireless handset
volumes, parts and
accessories, partly
offset by a higher
proportion of higher-
priced data capable
devices.
Prepaid expenses 105 112 (7) (6)% Mainly lower wireline
prepaid licences.
Derivative assets 1 10 (9) (90)% Mainly fair value
adjustments to
foreign exchange
hedges for wireless
handsets.
-------------------------------------------------------------------------
Current
Liabilities
Accounts 1,385 1,465 (80) (5)% Includes lower
payable and employee compensation
accrued and related benefits
liabilities and lower fourth
quarter capital
expenditures,
partially offset by
accrued pension plan
payments.
Income and other 182 163 19 12 % Reflects current year
taxes payable income tax expense,
offset by final
income tax payments
in 2009 for the 2008
tax year, as well as
2009 instalments.
Restructuring 135 51 84 165 % New obligations under
accounts current restructuring
payable and initiatives exceeded
accrued payments under
liabilities previous
restructuring
initiatives.
Dividends 150 151 (1) (1)% -
payable
Advance billings 674 689 (15) (2)% -
and customer
deposits
Current 82 4 78 n/m Reflects the May 2010
maturities of maturity of $50
long-term debt million TELUS
Communications Inc.
12% Series 1
debentures and the
July 2010 maturity of
$30 million TELUS
Communications Inc.
11.5% Series U First
Mortgage Bonds, net
of a small reduction
in capital leases.
Derivative 62 75 (13) (17)% Fair value
liabilities adjustments for share
options and
restricted share unit
hedges, including
unwind of option
hedges.
Current portion 294 459 (165) (36)% Primarily a reduction
of future in TELUS
income taxes Communications
Company partnership's
income that will be
allocated over the
next 12 months, as
well as net increases
in current
liabilities that are
not deductible in the
current period for
tax purposes.
-------------------------------------------------------------------------
Working (1,837) (1,543) (294) (19)% The reduction in
capital(1) working capital
contributed to the
decrease in long-term
debt.
-------------------------------------------------------------------------
Non-current
assets
Property, 7,729 7,317 412 6 % The increase was
plant, primarily from
equipment and broadband network
other, net builds. See Capital
expenditures in
Section 4.2 Cash used
by investing
activities and
Depreciation in
Section 2.3
Consolidated
operations.
Intangible 5,148 5,166 (18) (-)% See Capital
assets, net expenditures in
Section 4.2 Cash used
by investing
activities and
Amortization in
Section 2.3
Consolidated
operations. Included
in the balances at
December 31 are
wireless spectrum
licences of $3,849
million for 2009 and
2008.
Goodwill, net 3,572 3,564 8 - % Reflects goodwill
added for the
purchase of Black's.
Other long- 1,602 1,418 184 13 % Primarily pension
term assets plan funding and
continued
amortization of
transitional pension
assets.
Investments 41 42 (1) (2)% Adjustments to small
investments, net of
one new small
investment.
-------------------------------------------------------------------------
Non-current
liabilities
Long-Term Debt 6,090 6,348 (258) (4)% Includes:
- A $922 million
decrease in the
2011 U.S. dollar 8%
Notes through
redemption of 30%
of the principal
amount in December
2009, and Canadian
dollar value
changes of the
Notes (also see
Other long-term
liabilities);
- A net reduction of
$980 million in
amounts drawn
against the 2012
credit facility;
- $80 million
debentures and
first mortgage
bonds reclassified
to current
liabilities;
- Net proceeds of
$697 million from
the issue of 4.95%
five-year Notes in
May;
- Net proceeds of
$990 million from
the issue of 5.05%
10-year Notes in
December; and
- A $35 million
increase in
commercial paper.
-------------------------------------------------------------------------
Other 1,271 1,295 (24) (2)% Primarily changes in
Long-Term U.S. dollar exchange
Liabilities rates and a fair
value adjustment of
the derivative
liability associated
with the 2011 U.S.
dollar Notes,
partially offset by
an increase in
deferred revenue.
-------------------------------------------------------------------------
Future Income 1,319 1,213 106 9 % An increase in future
Taxes taxes on long-term
assets and
liabilities,
including unrealized
gains and losses on
derivatives and
reassessments for
prior year tax
issues, partly offset
by a revaluation for
statutory tax rate
changes.
-------------------------------------------------------------------------
Owners' Equity
Common Share 7,554 7,085 469 7 % Mainly Net income of
and Non- $998 million and
Voting Share Other comprehensive
equity income of $58 million
attributable to
holders of Common
Shares and Non-Voting
Shares, less $601
million of dividends
declared.
Non-controlling 21 23 (2) (9)% Dividends paid by a
interests subsidiary to non-
controlling
interests, net of $4
million Net income
attributable to non-
controlling
interests.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Current assets subtracting Current liabilities - an indicator of the
ability to finance current operations and meet obligations as they
fall due.
-------------------------------------------------------------------------
4. Liquidity and capital resources
The discussion in this section is qualified by the Caution regarding forward-looking statements at the beginning of Management's review of operations.
In the normal course, the Company has generated annual cash flow from operations exceeding annual capital investment needed to support business growth and re-invest in technology. In 2009, cash provided by operating activities exceeded cash used by investing activities, long-term debt was reduced and the average term to maturity of debt was extended by one year through financing activities. In 2008, cash provided by operating activities was supplemented with cash provided by financing activities to help fund the acquisition of Emergis and payment for AWS spectrum licences.
-------------------------------------------------------------------------
Summary of Consolidated
statements of Quarters ended Years ended
cash flows December 31 December 31
($ millions) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Cash provided by
operating activities 624 747 (16.5)% 2,904 2,819 3.0 %
Cash (used) by
investing activities (513) (643) 20.2 % (2,128) (3,433) 38.0 %
Cash (used) provided
by financing
activities (104) (136) 23.5 % (739) 598 n/m
-------------------------------------------------------------------------
Increase (decrease)
in cash and temporary
investments, net 7 (32) - 37 (16) -
Cash and temporary
investments, net,
beginning of period 34 36 - 4 20 -
-------------------------------------------------------------------------
Cash and temporary
investments, net,
end of period 41 4 n/m 41 4 n/m
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4.1 Cash provided by operating activities
Cash provided by operating activities decreased by
- Changes in proceeds from securitized accounts receivable (included in
Net change in non-cash working capital on the Consolidated statements
of cash flow) are a source of cash when the proceeds are increased,
and a use of cash when proceeds are reduced. The Company increased
proceeds by $100 million in the fourth quarter of 2009 as compared to
an increase of $50 million in the fourth quarter of 2008. For the
full year of 2009, the Company increased proceeds by $200 million as
compared to a $200 million reduction in proceeds for 2008.
Consequently, changes in securitized accounts receivable contributed
increased cash of $50 million and $400 million, respectively, in the
fourth quarter and full year of 2009 when compared to the same
periods in 2008. See Section 4.6 Accounts receivable sale.
- The Company has commenced to make significant income tax payments in
2009. Income tax net payments (recoveries) were $(4) million and
$266 million, respectively, for the fourth quarter and full year of
2009. In 2008, income tax payments net of recoveries were $2 million
in the fourth quarter and $10 million for the full year. Payments for
the full year 2009 included final instalments in respect of the 2008
tax year made in the first quarter, instalments for 2009, and
$69 million recoveries received for settlement of prior years' tax
matters.
- EBITDA decreased by $148 million and $288 million, respectively, in
the fourth quarter and full year of 2009 when compared to the same
periods in 2008. (See Section 2: Discussion of operations.) Excluding
expenses from defined benefit pension plans and restructuring, EBITDA
decreased by $79 million in the fourth quarter of 2009 and decreased
by $39 million for the full year of 2009.
- Contributions to employee defined benefit plans increased by
$19 million and $76 million, respectively, in the fourth quarter and
full year of 2009 as compared to the same periods in 2008, primarily
as a result of the stock market decline in 2008.
- Interest received increased by $51 million for the full year,
primarily for the settlement of prior years' tax matters.
- Interest paid increased by $103 million and $110 million,
respectively, primarily due to the $99 million paid in December 2009
in respect of the early partial redemption of U.S. dollar Notes and
the interest component of unwinding associated cross currency
interest rate swaps.
- Other changes in non-cash working capital, including a $143 million
reduction in inventory in 2009 as compared to a $114 million increase
during 2008, and liquidation of $42 million of short-term investments
in 2008.
4.2 Cash used by investing activities
Cash used by investing activities decreased by
Property, plant and equipment under construction totalled
-------------------------------------------------------------------------
Capital expenditures Quarters ended Years ended
($ millions, except December 31 December 31
capital intensity) 2009 2008 Change 2009 2008 Change
-------------------------------------------------------------------------
Wireline segment
(general) 322 395 (18.5)% 1,333 1,311 1.7 %
Wireless segment
(general) 192 236 (18.6)% 770 548 40.5 %
-------------------------------------------------------------------------
Capital expenditures
(general) 514 631 (18.5)% 2,103 1,859 13.1 %
Payment for AWS
spectrum licences
(wireless segment) - - n/m - 882 n/m
-------------------------------------------------------------------------
Total capital
expenditures 514 631 (18.5)% 2,103 2,741 (23.3)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total wireless capital
expenditures 192 236 (18.6)% 770 1,430 (46.2)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA less total
capital
expenditures(1) 275 306 (10.1)% 1,388 1,038 33.7 %
Capital
intensity(2) (%)
Of general capital
expenditures 21 26 (5)pts. 22 19 3 pts.
Of total capital
expenditures 21 26 (5)pts. 22 28 (6)pts.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See Section 6.1 EBITDA for the calculation and description.
(2) Capital intensity is the measure of capital expenditures divided by
operating revenues. This measure provides a basis for comparing the
level of capital expenditures to other companies of varying size
within the same industry.
-------------------------------------------------------------------------
Total capital expenditures decreased by
Total capital expenditures for the full year of 2009 decreased by
For the full year of 2009, EBITDA less total capital expenditures improved by
- Wireline segment
Wireline capital expenditures in 2009 decreased by $73 million in the
fourth quarter and increased by $22 million for the full year when
compared to 2008. The decrease for the fourth quarter primarily
reflects lower expenditures for network access resulting from a
slower economy, completion of a number of internal projects during
2008, and lower expenditures for large enterprise deals. The increase
for the full year was mainly due to investments in broadband and
TELUS TV initiatives primarily in B.C. and Alberta. Partly offsetting
this were expenditures incurred in 2008 for the billing and client
care platform implemented for B.C. residential customer accounts in
July 2008. Wireline cash flow (EBITDA less capital expenditures) in
2009 was $32 million in the fourth quarter and $225 million for the
full year. This reflects decreases of $18 million or 36% in the
fourth quarter and $238 million or 51% for the full year when
compared to the same periods in 2008.
- Wireless segment
General wireless capital expenditures in 2009 decreased by
$44 million in the fourth quarter and increased by $222 million for
the full year when compared to the same periods in 2008. The changes
mainly reflect ramp-up of new investments in HSPA technology and
service capability in the fourth quarter of 2008 through to the
November 2009 network launch. Total wireless capital expenditures in
2009 decreased by $660 million, reflecting payment of $882 million
for AWS spectrum licences in 2008, partly offset by higher HSPA
spending in 2009. Wireless cash flow (EBITDA less total capital
expenditures) in 2009 was $243 million in the fourth quarter and
$1,163 million for the full year. This reflects a decrease of
$13 million or 5% in the fourth quarter and an increase $588 million
or 102% for the full year when compared to the same periods in 2008.
4.3 Cash (used) provided by financing activities
Net cash used by financing activities in 2009 was
- The increase in cash dividends paid to holders of Common Shares and
Non-Voting Shares for the full year of 2009 primarily reflects a
change in timing for remittance of fourth quarter dividends. Cash
dividends paid in 2009 totalled $602 million for dividends declared
in the fourth quarter of 2008 (remitted January 2, 2009) and the
first, second and third quarters of 2009 - each 47.5 cents per share.
In comparison, dividends paid in 2008 totalled $433 million for
dividends declared in the first, second and third quarters of 2008,
as the dividend declared in the fourth quarter of 2007 was remitted
in December 2007 - each 45 cents per share.
- There were no purchases of TELUS shares under the normal course
issuer bid (NCIB) program in 2009. The program to purchase up to
eight million shares expired on December 22, 2009. During 2008, the
Company repurchased approximately 6.8 million shares for $280 million
under a previous program.
- Long-term debt issues
In May 2009, the Company successfully closed a public offering of
4.95%, Series CF Notes maturing in May 2014, for aggregate gross
proceeds of $700 million. Net proceeds of approximately $697 million
were used for corporate purposes, including repayment of amounts
outstanding under the 2012 credit facility and reducing outstanding
commercial paper.
In December 2009, the Company successfully closed a public offering
of 5.05%, Series CG Notes maturing in December 2019 for gross
proceeds of $1 billion. Net proceeds of approximately $990 million
were used to fund the redemption on December 31, 2009 of 30% of the
outstanding U.S. dollar 8% Notes due June 2011, as well as payments
required to terminate cross currency interest rate swaps associated
with the redeemed Notes.
The Series CF and Series CG Notes are redeemable at the option of the
Company, in whole at any time, or in part from time to time, on not
fewer than 30 and not more than 60 days' prior notice, at redemption
prices equal to the greater of the discounted value of the Notes, or
100% of the principal amount thereof. In addition, accrued and unpaid
interest, if any, will be paid to the date fixed for redemption. The
discounted value for Series CF Notes is the present value of the
Notes discounted at the Government of Canada yield plus 71 basis
points. The discounted value of Series CG Notes is the present value
of the Notes discounted at the Government of Canada yield plus 45.5
basis points.
Series CF and Series CG Notes require that the Company make an offer
to repurchase the Notes at a price equal to 101% of their principal
plus accrued and unpaid interest to the date of repurchase upon the
occurrence of a change in control triggering event, as defined in the
respective supplemental trust indentures. Credit rating agencies
assigned the same investment-grade ratings to Series CF and Series CG
Notes as TELUS' previous Notes. See Section 4.7 Credit ratings.
During 2008 the Company publicly issued $500 million, 5.95% Series CE
Notes maturing in April 2015. Net proceeds were used for corporate
purposes including a net reduction in utilized 2012 bank facilities
and a reduction in proceeds from securitized accounts receivable,
with the latter event being reflected as a change in non-cash working
capital (see Section 4.1 Cash provided by operating activities).
- Partial redemption of U.S. dollar 8% Notes due June 1, 2011
The Company redeemed on December 31, 2009, 30% or U.S.$583.5 million
principal amount (including U.S.$6 million indirectly owned by the
Company) of the outstanding U.S.$1.945 billion (including
U.S.$20 million indirectly owned by the Company) 8% Notes due June 1,
2011. The Company also terminated cross currency interest rate swaps
associated with the redeemed Notes.
The redemption price for the redeemed Notes, net of such Notes owned
indirectly TELUS, excluding accrued interest, was U.S.$577 million,
or $607 million. The payment required to terminate the associated
swaps was $315 million. The Company recorded pre-tax charges of
$63 million for the early redemption and charge $36 million upon
terminating the associated swaps. The U.S. dollar Notes were swapped
at issuance in 2001 into a Canadian dollar liability with an
effective yield of 8.493%. The partial redemption reduced refinancing
risk in 2011 and provides a lower effective interest rate for the
replaced debt. The average term to maturity of long-term debt
increased to five years at December 31, 2009, as compared to four
years at December 31, 2008.
- Bank facilities and commercial paper
The Company often shifts among short-term financing sources to take
advantage of interest cost differentials. In the first quarter of
2009, net amounts drawn on the 2012 credit facility decreased by
$680 million to $300 million, while issued commercial paper increased
by $756 million to $1,188 million. Due primarily to the successful
issue of new Notes in May 2009, during the second quarter the Company
reduced net amounts drawn on the 2012 credit facility to $nil and
reduced commercial paper to $604 million. The Company further reduced
commercial paper to $534 million in the third quarter and to
$467 million in the fourth quarter.
In 2008, during the first quarter, the Company increased utilization
of the 2012 credit facility from $nil to $321 million and increased
the amount of issued commercial paper from $513 million to
$800 million for general corporate purposes, including the January
acquisition of Emergis. During the second quarter of 2008, the
Company reduced the amount drawn on the 2012 credit facility to
$162 million at June 30, while the balance of commercial paper was
unchanged. During the third quarter, the Company increased utilized
bank facilities to $430 million and increased outstanding commercial
paper to $968 million to help fund payment of AWS spectrum licences.
During the fourth quarter, commercial paper was reduced to
$432 million, while amounts drawn on the 2012 credit facility
increased to $980 million.
- TELUS Communications Inc. long-term debt
Effective June 12, 2009, TELUS Corporation guaranteed the payment of
principal and interest for TCI debentures and TCI first mortgage
bonds.
4.4 Liquidity and capital resource measures
-------------------------------------------------------------------------
Liquidity and capital resource measures
As at, or years ended, December 31 2009 2008 Change
-------------------------------------------------------------------------
Components of debt and coverage ratios(1)
($ millions)
-------------------------------------------------------------------------
Net debt 7,312 7,286 26
Total capitalization - book value 14,959 14,524 435
EBITDA - excluding restructuring costs 3,681 3,838 (157)
Net interest cost 532 463 69
-------------------------------------------------------------------------
Debt ratios
-------------------------------------------------------------------------
Fixed-rate debt as a proportion of total
indebtedness (%) 87 77 10 pts.
Average term to maturity of debt (years) 5.0 4.0 1.0
Net debt to total capitalization (%)(1) 48.9 50.2 (1.3)pts.
Net debt to EBITDA - excluding
restructuring costs(1) 2.0 1.9 0.1
-------------------------------------------------------------------------
Coverage ratios(1)
-------------------------------------------------------------------------
Interest coverage on long-term debt
(Earnings coverage) 3.1 4.3 (1.2)
EBITDA - excluding restructuring costs
interest coverage 6.9 8.3 (1.4)
-------------------------------------------------------------------------
Other measures
-------------------------------------------------------------------------
Free cash flow ($ millions)(2) 500 361 139
Dividend payout ratio of sustainable
net earnings guideline - 45 to 55%(1)
--------------------------------------
Dividend payout ratio - actual earnings,
excluding income tax-related adjustments,
loss on redemption of long-term debt
and net-cash settlement feature (%) 67 56 11 pts.
Dividend payout ratio - actual earnings (%) 61 54 7 pts.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See Section 6.4 Definitions of liquidity and capital resource
measures.
(2) See Section 6.2 Free cash flow for the definition.
-------------------------------------------------------------------------
Net debt at
The proportion of debt on a fixed-rate basis was 87% on
The interest coverage on long-term debt ratio was 3.1 times in 2009, down from 4.3 times one year earlier. An increase in long-interest expense, including losses on long-term debt redemption recorded in
Free cash flow (FCF) for 2009 increased by
The Company's strategy is to maintain the financial policies and guidelines set out below. The Company believes that these measures are currently at the optimal level and by maintaining credit ratings in the range of BBB+ to A-, or the equivalent, are expected to provide reasonable access to capital markets.
TELUS' long-term financial guidelines and policies are:
- Net debt to EBITDA - excluding restructuring costs of 1.5 to
2.0 times
The ratio at December 31, 2009 was slightly under 2.0 times.
- Dividend payout ratio target guideline of 45 to 55% of sustainable
net earnings
The target guideline is on a prospective basis, rather than on a
trailing basis. The ratio calculated for the year ended December 31,
2009, was 67% when excluding from earnings income tax-related
adjustments, the loss on redemption of long-term debt and a minimal
effect from a net-cash settlement feature. The measure calculated
based on actual 2009 earnings was 61%, and based on 2010 targets for
earnings per share (see Sections 1.4 and 1.5), the payout range is 58
to 66%. This latter calculation was factored into the Board decision
to not increase the dividend level for the declared dividend in the
fourth quarter of 2009.
4.5 Credit facilities
At
TELUS credit facilities at December 31, 2009
-------------------------------------------------------------------------
Out- Backstop
standing for
undrawn commer-
letters cial
of paper Available
($ in millions) Expiry Size Drawn credit program liquidity
-------------------------------------------------------------------------
Five-year
revolving
facility(1) May 1, 2012 2,000 - (123) (467) 1,410
364-day
revolving
facility(2) December 31, 2010 300 - - - 300
Other bank
facilities - 62 (6) (3) - 53
-------------------------------------------------------------------------
Total - 2,362 (6) (126) (467) 1,763
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Canadian dollars or U.S. dollar equivalent.
(2) Canadian dollars only.
-------------------------------------------------------------------------
TELUS' revolving credit facilities contain customary covenants, including a requirement that TELUS not permit its consolidated Leverage Ratio (debt to trailing 12-month EBITDA) to exceed 4 to 1 (approximately 2.0 to 1 at
4.6 Accounts receivable sale
TELUS Communications Inc. (TCI), a wholly owned subsidiary of TELUS, is a party to an agreement with an arm's-length securitization trust associated with a major Schedule I Canadian bank, under which TCI is able to sell an interest in certain of its trade receivables. As a result of selling the interest in certain of the trade receivables on a fully serviced basis, a servicing liability is recognized on the date of sale and is, in turn, amortized to earnings over the expected life of the trade receivables. A new agreement in
TCI is required to maintain at least a BBB (low) credit rating by DBRS Ltd. or the securitization trust may require the sale program to be wound down. The necessary credit rating was exceeded by three levels at A (low) as of
-------------------------------------------------------------------------
Balance of proceeds from
securitized receivables 2009, 2009, 2009, 2009,
($ millions) Dec. 31 Sept. 30 June 30 Mar. 31
-------------------------------------------------------------------------
500 400 400 300
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance of proceeds from
securitized receivables 2008, 2008, 2008, 2008,
($ millions) Dec. 31 Sept. 30 June 30 Mar. 31
-------------------------------------------------------------------------
300 250 150 500
-------------------------------------------------------------------------
4.7 Credit ratings
There were no changes to the Company's investment grade credit ratings in 2009. Four credit rating agencies that cover TELUS assigned their existing ratings, all with a stable outlook or trend, to the Company's
-------------------------------------------------------------------------
Credit rating summary DBRS Ltd. S&P Moody's FitchRatings
-------------------------------------------------------------------------
TELUS Corporation
Notes A (low) BBB+ Baa1 BBB+
Commercial paper R-1 (low) - - -
TELUS Communications Inc.
Debentures A (low) BBB+ - BBB+
Medium-term notes A (low) BBB+ - BBB+
First mortgage bonds A (low) A- - -
-------------------------------------------------------------------------
Trend or outlook Stable Stable Stable Stable
-------------------------------------------------------------------------
5. Risks and risk management
The discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of Management's review of operations. The following are significant updates to the risks described in Section 10 of TELUS' 2008 annual and 2009 interim first, second and third quarter Management's discussions and analyses.
5.1 Regulatory
Foreign ownership restrictions
In
TELUS has never opposed foreign ownership restrictions being lifted in
5.2 Human resource developments
National Collective bargaining in 2010
The collective agreement between TELUS and the Telecommunications Workers Union (TWU) will expire on
In any set of labour negotiations, there can be no assurance that the negotiated compensation expenses or changes to operating efficiency will be as planned or that reduced productivity and work disruptions will not occur during the course of collective bargaining prior to settlement.
Risk mitigation: A governance model is in place to ensure the financial and operating impact of any proposed terms of settlement are assessed and determined to be aligned with TELUS' strategic direction. As is prudent in any round of collective bargaining, any potential need to continue operations in response to work disruptions will be addressed through contingency planning and emergency operations plans.
5.3 Economic growth and fluctuations
The Canadian economy moved into positive economic growth territory during the third quarter of 2009, ending the recession that began in the fourth quarter of 2008. Unemployment levels rose to approximately 8.6% in the fourth quarter of 2009, up from 6.4% one year earlier, and it is expected that improvement in unemployment levels will lag the economic recovery. The Bank of Canada's
With recent strength in the Canadian natural resource sector and growth in Asia, growth in Alberta and British Columbia may be slightly stronger than in Central
Resumption of an economic recession may adversely impact TELUS
An extended economic downturn may cause residential and business telecommunications customers to delay new service purchases, reduce volumes of use, discontinue use of services or seek lower-priced alternatives. Significant economic downturns or recessions could adversely impact TELUS' profitability, free cash flow and bad debt expense, and potentially require the Company to record impairments to the carrying value of its assets including, but not limited to, its intangible assets with indefinite lives (spectrum licences) and its goodwill. Impairments to the carrying value of assets would result in a charge to earnings and a reduction in owners' equity, but would not affect cash flow.
Risk mitigation: The Company cannot completely mitigate economic risks. TELUS continues to focus on five key vertical markets of the public sector, healthcare, financial services, energy and telecom wholesale. The public sector, healthcare and financial services vertical markets are generally expected to be less exposed to economic cycles. TELUS continues to pursue cost reduction and efficiency initiatives. The Company expects its 2010 capital expenditures to be 19% lower than in 2009, which included significant investments in wireless and wireline broadband. If necessary, the Company could consider additional cost and efficiency initiatives and lower capital expenditures level in future years.
Pension funding
Economic and capital market fluctuations could also adversely impact the funding and expense associated with the defined benefit pension plans that TELUS sponsors. There can be no assurance that TELUS' pension expense and funding of its defined benefit pension plans will not increase in the future and thereby negatively impact earnings and/or cash flow. Defined benefit funding risks may occur if total pension liabilities exceed the total value of the respective trust funds. Unfunded differences may arise from lower than expected investment returns, reductions in the discount rate used to value pension liabilities, and actuarial loss experiences.
Risk mitigation: TELUS seeks to mitigate this risk through the application of policies and procedures designed to control investment risk and ongoing monitoring of its funding position. At
6. Definitions and reconciliations
6.1 Earnings before interest taxes depreciation and amortization (EBITDA)
TELUS has issued guidance on and reports EBITDA because it is a key measure that management uses to evaluate performance of segments and the Company. EBITDA is also utilized in measuring compliance with debt covenants. (
EBITDA is a measure commonly reported and widely used by investors as an indicator of a company's operating performance and ability to incur and service debt, and as a valuation metric. Management's definition is a top-down calculation.
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EBITDA (management's definition) Quarters ended Years ended
December 31 December 31
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($ millions) 2009 2008 2009 2008
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Operating revenues 2,443 2,454 9,606 9,653
Deduct:
Operations expense 1,577 1,479 5,925 5,815
Restructuring costs 77 38 190 59
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789 937 3,491 3,779
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Management believes EBITDA assists investors in comparing a company's operating performance on a consistent basis, before taking into account financing decisions and before depreciation and amortization expenses, which are non-cash in nature and can vary significantly depending upon accounting methods or non-operating factors such as historical cost.
EBITDA is not a calculation based on Canadian or U.S. GAAP and should not be considered an alternative to Net income in measuring the Company's performance, nor should it be used as an exclusive measure of cash flow, because it does not consider the impact of working capital growth, capital expenditures, debt principal reductions and other sources and uses of cash, which are disclosed in the Consolidated statements of cash flows. Investors should carefully consider the specific items included in TELUS' computation of EBITDA. While EBITDA has been disclosed herein to permit a more complete comparative analysis of the Company's operating performance and debt servicing ability relative to other companies, investors are cautioned that EBITDA as reported by TELUS may not be comparable in all instances to EBITDA as reported by other companies.
The CICA has defined standardized EBITDA in Improved Communications with Non-GAAP Financial Measures to foster comparability of non-GAAP measures between entities. Similar to management's definition of EBITDA, standardized EBITDA is an indication of an entity's capacity to generate income from operations before taking into account management's financing decisions and costs of consuming tangible and intangible capital assets, which vary according to their vintage, technological currency and management's estimate of their useful life. Accordingly, standardized EBITDA comprises revenue less operating costs before interest expense, capital asset amortization and impairment charges, and income taxes. The following reconciles management's definition of EBITDA with Net income and standardized EBITDA.
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EBITDA reconciliation Quarters ended Years ended
December 31 December 31
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($ millions) 2009 2008 2009 2008
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Net income 156 285 1,002 1,131
Financing costs 230 118 532 463
Income taxes (48) 88 203 436
Depreciation 347 351 1,341 1,384
Amortization of intangible assets 94 84 381 329
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Standardized EBITDA (CICA guideline) 779 926 3,459 3,743
Other expense (income) 10 11 32 36
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EBITDA (management's definition) 789 937 3,491 3,779
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Management also calculates EBITDA less capital expenditures as a simple proxy for cash flow at a consolidated level and in its two reportable segments. EBITDA less capital expenditures may be used for comparison to the reported results for other telecommunications companies over time and is subject to the potential comparability issues of EBITDA described above.
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Quarters ended Years ended
December 31 December 31
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($ millions) 2009 2008 2009 2008
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EBITDA 789 937 3,491 3,779
Capital expenditures (514) (631) (2,103) (1,859)
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EBITDA less capital expenditures 275 306 1,388 1,920
Payment for AWS spectrum licences - - - (882)
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EBITDA less total capital expenditures 275 306 1,388 1,038
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6.2 Free cash flow
TELUS reports free cash flow because it is a key measure used by management to evaluate the Company's performance. Free cash flow excludes certain working capital changes and other sources and uses of cash, as found in the Consolidated statements of cash flows. Free cash flow is not a calculation based on Canadian or U.S. GAAP and should not be considered an alternative to the Consolidated statements of cash flows. Free cash flow can be used to gauge TELUS' performance over time. Investors are cautioned that free cash flow as reported by TELUS may not be comparable in all instances to free cash flow as reported by other companies, and differs from standardized free cash flow defined by the CICA. Management's definition of free cash flow provides an indication of how much cash generated by operations is available after capital expenditures, but before acquisitions, proceeds from divested assets and changes in certain working capital items (such as trade receivables, which can be significantly distorted by securitization changes that do not reflect operating results, and trade payables).
The following shows management's calculation of free cash flow.
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Free cash flow calculation Quarters ended Years ended
December 31 December 31
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($ millions) 2009 2008 2009 2008
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EBITDA (management's definition) 789 937 3,491 3,779
Share-based compensation (25) (20) (8) 5
Net employee defined benefit plans
expense (recovery) 8 (27) 20 (102)
Employer contributions to employee
defined benefit plans (45) (26) (180) (104)
Restructuring costs net of cash
payments 51 30 84 16
Donations and securitization fees
included in Other expense (7) (8) (25) (30)
Cash interest paid (296) (193) (567) (457)
Cash interest received - 1 54 3
Income taxes refunded (paid);
and other 4 (2) (266) (8)
Capital expenditures (514) (631) (2,103) (1,859)
Payment for AWS spectrum licences - - - (882)
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Free cash flow (management's
definition) (35) 61 500 361
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The CICA defined standardized free cash flow in Improved Communications with Non-GAAP Financial Measures to foster comparability of non-GAAP measures between entities. Standardized free cash flow is an indication of the entity's capacity to generate discretionary cash from operations, comprising cash flows from operating activities less net capital expenditures and those dividends that are more representative of interest costs. It does not necessarily represent the cash flow in the period available for management to use at its discretion, which may be affected by other sources and non-discretionary uses of cash. The following reconciles management's definition of free cash flow with standardized free cash flow and Cash provided by operating activities:
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Free cash flow reconciliation Quarters ended Years ended
December 31 December 31
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($ millions) 2009 2008 2009 2008
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Cash provided by operating activities 624 747 2,904 2,819
Deductions:
Capital expenditures (514) (631) (2,103) (1,859)
Payment for AWS spectrum licences - - - (882)
Stipulated dividends n/a n/a n/a n/a
Proceeds from disposition of
capital assets - - - -
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Standardized free cash flow
(CICA guideline) 110 116 801 78
Amortization of deferred gains on
sale-leaseback of buildings,
amortization of deferred charges
and other, net 1 (8) (8) -
Reduction (increase) in securitized
accounts receivable (100) (50) (200) 200
Non-cash working capital changes
except changes from income tax
payments (receipts), interest
payments (receipts) and
securitized accounts receivable (46) 3 (93) 83
Proceeds from disposition of
capital assets - - - -
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Free cash flow (management's
definition) (35) 61 500 361
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n/a - not applicable.
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6.3 Definitions of wireless operating indicators
These measures are industry metrics and are useful in assessing the operating performance of a wireless company.
Average revenue per subscriber unit per month (ARPU) is calculated as Network revenue divided by the average number of subscriber units on the network during the period and expressed as a rate per month. Data ARPU is a component of ARPU, calculated on the same basis for revenue derived from services such as text messaging, mobile computing, personal digital assistance devices, Internet browser activity and pay-per-use downloads.
Churn per month is calculated as the number of subscriber units disconnected during a given period divided by the average number of subscriber units on the network during the period, and expressed as a rate per month. A prepaid subscriber is disconnected when the subscriber has no usage for 90 days following expiry of the prepaid card.
Cost of acquisition (COA) consists of the total of handset subsidies, commissions, and advertising and promotion expenses related to the initial subscriber acquisition during a given period. As defined, COA excludes costs to retain existing subscribers (retention spend).
COA per gross subscriber addition is calculated as cost of acquisition divided by gross subscriber activations during the period.
EBITDA excluding COA is a measure of operational profitability normalized for the period costs of adding new customers.
Retention spend to Network revenue represents direct costs associated with marketing and promotional efforts aimed at the retention of the existing subscriber base divided by Network revenue.
6.4 Definitions of liquidity and capital resource measures
Dividend payout ratio and dividend payout ratio of sustainable net earnings: For actual earnings, the measure is defined as the quarterly dividend declared per Common Share and Non-Voting Share, as reported on the financial statements, multiplied by four and divided by the sum of basic earnings per share for the most recent four quarters for interim reporting periods (divided by annual earnings per share for fiscal years). The target guideline for the annual dividend payout ratio is on a prospective basis, rather than on a trailing basis, and is 45 to 55% of sustainable net earnings. The dividend payout ratio on an actual basis, excluding income tax-related adjustments and ongoing impacts of a net-cash settlement feature introduced in 2007, is considered more representative of a sustainable calculation.
EBITDA - excluding restructuring costs is used in the calculation of Net debt to EBITDA and EBITDA interest coverage, consistent with the calculation of the Leverage Ratio and the Coverage Ratio in credit facility covenants. Restructuring costs were
EBITDA - excluding restructuring costs interest coverage is defined as EBITDA excluding restructuring costs divided by Net interest cost. Historically, this measure is substantially the same as the Coverage Ratio covenant in TELUS' credit facilities.
Interest coverage on long-term debt (earnings coverage) is calculated on a 12-month trailing basis as Net income before interest expense on long-term debt and income tax expense, divided by interest expense on long-term debt. Interest expense on long-term debt includes losses on redemption of long-term debt. The calculation is based on total long-term debt, including long-term debt due within one year.
Net debt is a non-GAAP measure whose nearest GAAP measure is Long-term debt, including Current maturities of long-term debt, as reconciled below. Net debt is one component of a ratio used to determine compliance with debt covenants (refer to the description of Net debt to EBITDA below).
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As at December 31
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($ millions) 2009 2008
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Long-term debt including current portion 6,172 6,352
Debt issuance costs netted against long-term debt 30 28
Derivative liability 721 778
Accumulated other comprehensive income amounts
arising from financial instruments used to manage
interest rate and currency risks associated with
U.S. dollar denominated debt (excluding tax effects) (70) (168)
Cash and temporary investments (41) (4)
Proceeds from securitized accounts receivable 500 300
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Net debt 7,312 7,286
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The derivative liability in the table above relates to cross currency interest rate swaps that effectively convert principal repayments and interest obligations to Canadian dollar obligations, and is in respect of the U.S.
Net debt to EBITDA - excluding restructuring costs is defined as Net debt as at the end of the period divided by the 12-month trailing EBITDA - excluding restructuring costs. TELUS' long-term guideline range for Net debt to EBITDA is from 1.5 to 2.0 times. Historically, Net debt to EBITDA - excluding restructuring costs is substantially the same as the Leverage Ratio covenant in TELUS' credit facilities.
Net debt to total capitalization provides a measure of the proportion of debt used in the Company's capital structure.
Net interest cost is defined as Financing costs before gains on redemption and repayment of debt, calculated on a 12-month trailing basis. No gains on redemption and repayment of debt were recorded in the respective periods. Losses recorded on the redemption of long-term debt are included in net interest cost. Net interest costs for the years ended
Total capitalization - book value is calculated as Net debt plus Owners' equity, excluding accumulated other comprehensive income or loss:
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As at December 31
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($ millions) 2009 2008
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Net debt 7,312 7,286
Owners' equity
Common Share and Non-Voting Share equity 7,554 7,085
Add back Accumulated other comprehensive loss 72 130
Non-controlling interests 21 23
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Total capitalization - book value 14,959 14,524
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For further information: Media relations: Shawn Hall, (604) 619-7913, [email protected]; Investor relations: Robert Mitchell, (416) 279-3219, [email protected]
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